Dubai: The small-to-medium sized enterprise (SME) sector, which witnessed rapid expansion supported by liberal bank funding in the post-financial crisis years, is finding the going tough as excess leverage and a difficult business environment are resulting in delays and/or defaults in loan repayments.
Banks which were liberal in offering unsecured loans to the SMEs are now seeing a significant rise in non-performing loans (NPLs) from this segment.
While the Central Bank of UAE applied a number of regulatory restrictions on personal loans and mortgages, ranging from eligibility and tenures to loans-to-value ratios (LTVs) during the last two years, unsecured lending to SMEs was left largely to the discretion of banks.
This resulted in some of these loans finding their way into consumption.
“In many cases, SMEs are run by single owners and thus the difference between company and the individual is blurred and this where there are chances of some of the business loans finding [their] way into consumption,” said Nilanjan Ray, managing director, Global Commercial Banking of NBAD.
Non-performing loans
Faced with rising NPLs, many UAE banks have begun reviewing their SME loan portfolios.
“Banks need to balance their SME loan portfolios with prudent limits on unsecured portion of their lending,” Ray said. “At no point [has] NBAD has exceeded 10 per cent of exposure to unsecured loans.”
Deleveraging and consolidation is already underway in the SME sector.
Between 2008 and 2015 almost all banks were focused on building and expanding their SME business portfolios.
But beginning this year, banks have been faced with asset-quality issues resulting from their SME lending and some of these banks have already started taking corrective actions.
“Deleveraging in the SME sector is expected to go on for another two- to three quarters setting the stage for a more mature relationship between banks and SMEs.
"We are already seeing a trend of consolidation in the SME segment encouraged by lenders. In many cases SMEs are showing greater sophistication in dealing with a difficult business environment; on the other hand banks are working on self-regulation to achieve prudent lending practices,” said Ray.
While most SME lending is unsecured in nature, SME portfolio sizes differ from bank to bank. After going through nearly 10 years of lending growth in this segment, banks are clearly consolidating SME lending with more focus on asset quality.
The UAE has about 300,000 SMEs, with about 100,000 being eligible for banking services.
Currently the total exposure of banks to SMEs in the country accounts for about 5 per cent of total lending while their contribution to total bank deposits is about 6 per cent, according to Cedar Consulting.
