Dubai: Forcing banks to write off loans to help customers tide over their financial difficulties will set a wrong precedent and will adversely affect the health of bank balance sheets, bankers and analysts told Gulf News on Sunday.
"Banks can at best restructure loans, waive interest payments and facilitate early settlements of loans without charging any penalty on customers facing financial difficulties.
"But if we force banks to write off loans, we will soon have banks facing difficulties," the retail banking head of a Dubai-based bank said.
Last week, the UAE Central Bank directed lenders to help reduce the debt burden of Emiratis. However, the apex bank did not specify how the banks should do so.
Many bankers said that they are working with the government to address this issue on a programme announced earlier this year.
In January, the government said it would settle Dh2 billion of debt owed by nationals.
"Banks are already participating in a government programme to reduce the debt burden of the UAE national customers. Definitely, it is not done through handing out free cheques," Jonathan Morris, CEO of Standard Chartered UAE, said.
Nationals benefit
Banking industry sources said yesterday that a number of UAE nationals have already benefited from the government scheme that is subject to conditions.
"We get a few UAE national customers every day who come to do the necessary formalities to access the government funds to restructure their debts.
"While the government assistance varies from 50 per cent to 70 per cent of the outstanding debt, the remainderg is restructured into easy installment schemes," a banker said.
On the Central Bank's direction, from last May banks operating in the UAE had reduced the debt burden ratio (DBR) or the total installment payable as a share of the monthly income from 60 per cent to 50 per cent for salary earners and 30 per cent for retired Emiratis.
Although banks are governed by stringent provisioning guidelines and have taken provisions on most of these debts, analysts said if banks are forced to write off these debts, it will have an impact on their profitability.
Leading banks in the country experienced a decline in the ratio of non-performing assets to total assets (NPL ratio) last year, but for the fourth consecutive year, significant shares of their earnings had to be set aside to meet provisioning requirements on impaired loans.
Despite the declining NPL ratios, larger banks continued to report high provisions in absolute terms as major government-owned entities and a few other corporates are restructuring their debt.
Last year, almost all banks reported sharp declines in fee incomes following the implementation of Central Bank rules on fees charged for banking services.
Analysts said large-scale loan write-offs could upset the nascent recovery in the banking sector, which is already bearing the burden of corporate restructurings.
