Dubai: The UAE banking sector is expected to face a big surge in possible defaults — also known as loan impairments — from small and medium enterprises (SMEs) this year, said AbdulAziz Al Ghurair, Chairman of UAE Banks Federation.
Al Ghurair who is also the CEO of Mashreq said banks in the country have been experiencing higher impairments from the SME sector since the beginning of this year.
“We could expect the total impairment from SME lending ranging between Dh5 billion and Dh7 billion for the full year. We are trying to collect full information from banks,” he said.
The 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.
“Many of these firms over borrowed from multiple banks. After the launch of the credit bureau, banks came to know the actual exposure levels of these firms, resulting in restrictions on access to more loans. Some customers panicked and ran away,” Al Ghurair said.
Faced with rising non-performing loans [loans which are in default], many UAE banks have begun reviewing their SME loan portfolios. Deleveraging and consolidation is already underway in the SME sector as banks are tightening lending norms.
“I think there will be some rethinking on SME lending in the context of rising NPLs. The changes will be qualitative in nature with high performing SMEs getting easy access to bank funding at attractive rates while riskier ones will face higher interest rates,” Al Ghurair said.
Although a total impairment of Dh5 to Dh7 billion appears large, Al Ghurair said on a total asset size of Dh2.4 trillion, these accounts for just 0.4 per cent of the total banking assets of the UAE.
Allaying fears that the rise in loan impairments will drastically reduce SME lending by banks, Mubarak Rashed Al Mansouri, Governor of the Central Bank said the UAE government and the central bank is committed to the development of a healthy SME sector.
“We need to offer institutional support to SMEs to better deal with market forces and offer them credible credit guarantee scheme in order to decrease risks of default,” Al Mansouri said.
“We are pressing ahead with the bankruptcy law for the stability of the SME sector, I hope this will bring about more confidence in the sector,” he said.
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.
