UBF says new ‘Modus Operandi’ sets precedent for self-regulation

Dubai: The so called ‘Modus Operandi’ solution that the UAE Banks Federation has provided for restructuring of loans to distressed SMEs could be a precedent for self-regulation, its chief Abdul Aziz Al Ghurair said on Monday.

In the last quarter of 2015, the UBF estimated that loan impairments in the SME portfolio could be in the range of Dh5-7 billion. Though the UBF didn’t provide the revised figure, it indicated that loans to small enterprises amounted to 3-5 per cent of the total balance sheet, and 60 per cent of the clients were in the food, oil and gas sectors.

“Everybody wants to find the best alternative solution [for the issue of SMEs’ bad debts] for everyone. This is the test and all the UAE banks got together and put the solution on the table voluntarily, and this would bring all the banks together — today for this, tomorrow for some other issue — so we have a precedent that banks can come tighter. And we don’t have to be regulated by a third party on what to do and what not to do,” Al Ghurair said.

UBF expects this to be a positive for the banks, customer, and for the economy. “When you are proactive, you can control the outcome, but when you are reactive then you don’t know what the outcome would be,” Al Ghurair said.

He reckons that there were two main reasons for the stress in the SMEs.

“Our customers had overstocked and now does not know what to do with it, and the second part is that commodities prices have collapsed in the meantime. These are the two major issues,” he said.

Nitish Bhojnagarwala, assistant vice-president at Moody’s Investor Services, said that “while the exposure (to SMEs) remains limited for the system as a whole, it maybe significant for some smaller banks which were growing rapidly in this segment.”

Slowdown in lending

“The role of the bank is not blindly continue to lend. We will lend as long as the economy is in good shape and customer is in a good shape. So if the economy slows, the customers slows, and the bank will also slow its lending to its customers,” Al Ghurair said.

The UAE economy is expected to slow to 3-3.5 per cent this year, according to analysts, and that shouldn’t be a cause of concern as its not a crisis situation, Shayne Nelson, Group Chief Executive officer of Emirates NBD, told Gulf News earlier in the month.

“In our business, leading indicators such as loan impairments, numbers from retail banking portfolios and collection records have so far remained positive. However, we expect elevated stress levels in some sectors especially businesses that are directly linked to oil and gas,” Nelson said.

“Balance sheets of most companies are much healthier than what they used to be during the financial crisis years. Clearly, all have not forgotten lessons learnt in the past and leverage is within manageable levels,” Nelson added.