It was yet another year of strong growth for banks with healthy profits and budgets being met in most cases. Are banks expecting the same in 2015?
Judging by what I hear from budgets set for the current year, the answer should be “Yes”. Given the environment, I think this will be challenging and the balancing act between risk and reward will be particularly precarious. Here are some thoughts on why.
The collapse in oil prices always hits economies with a lag. For the UAE at a federal level, the impact will be not so severe for a variety of reasons, but, ironically, for Dubai the impact will be felt more than in Abu Dhabi, because of the importance of tourists and investors (especially from oil producing countries) to Dubai.
Capital inflows have slowed, partly evidenced by the cooling of the property market. There are no reasons for capital outflows, so bank liquidity will remain strong — therefore this will not be an impediment to growth in lending.
The collapse of the rouble and sanctions against Russian entities have adversely affected Russian tourist arrivals into Dubai. The retail and hospitality businesses have been hit as a result. Other wholesale businesses have been affected — for instance the market for furs, in Deira. Yes, furs.
It is a little known fact that Dubai is a huge marketplace for fur and leather outer clothing. Buyers were mostly Russians and this business is suffering. (Fur traders are going in for business loan top ups to help ease cashflows!) All the above sectors are SME dominated.
Infrastructure spending in Dubai is accelerating. The contracting business has received a fillip thanks largely to property projects being announced by government-owned entities. The impact on the economy, however, will be felt commencing mid-2015. This industry has a huge SME base feeding it.
Capital expenditure by oil and gas companies in Abu Dhabi may slow, affecting the SME base feeding off it as well. Low oil prices have affected the budgets of GCC countries, which in turn will affect imports from Dubai and tourist arrivals as well.
All is not bad. The sentiment in the UAE is positive. UAE’s budget is well structured, with Dubai’s indicating a surplus. Judging by loan growth and discussions with SMEs, business outlook is reasonably positive.
On a more micro level, several factors will affect lending in Dubai. Firstly, there have been a few large loan delinquencies in 2014, affecting the dominant lenders. Secondly, banks practically threw business loans at the SME market in 2014, enabling companies with turnover as little as Dh40 million to obtain loans totalling more than Dh7 million from several banks. At interest rates of 18 per cent per annum and above, servicing them in a tough environment will be challenging.
The few banks that have grown their business loan books are likely to rein in SME lending. However, others new to the SME business are discovering the joys of this sector — but not in the micro-lending segment.
Malpractices in the SME sector — largely to do with fudging the figures with the assistance of a surfeit of dodgy auditors — are having a serious impact on SME lending policies. Due diligence processes are being tightened, more questions asked, and a more aggressive position on exiting shady or stressed clients is being taken.
So what does this all mean for the SME sector in Dubai? It looks like small loan delinquencies will rise. This will lead to a timely slowdown in the disbursement of expensive business loans that primarily cater to the micro and small segments of the SME market.
Banks continue to set unrealistic income targets to business heads, so the pressure on making compromises on quality will increase. Risk management divisions are evaluated on loan-loss provisions, so the natural tension between risk and business will increase and decision-making is likely to be slowed by onerous due diligence and extra caution.
Banks with large exposures to the SME space may slow lending and adopt somewhat of a wait-and-watch policy.
Interest rates charged to SMEs will not fall despite comfortable liquidity. This will provide an added attraction for some of the smaller banks to enter the SME space, as we are currently witnessing.
The entry of new lenders will ease the otherwise expected slowdown in SME lending, but not to any meaningful extent, as new and small lenders typically start cautiously and on a small scale.
So what should SMEs do? They will do well to manage their finances — especially costs and receivables — very tightly indeed.
Planning for borrowing needs to be done far ahead, more so than normal. Requests for credit facilities need to be properly justified and professionally presented.
If you as a SME head is not fudging the books, you need to get yourself a good auditor. The incremental cost is not much, but the integrity of your financial statements will significantly improve and, with this, the perceptions of banks of your business.
This could very well represent a conservative point of view, but conversations with credit risk managers at banks also reveal similar opinions. In the current scenario, risk managers will prevail. So, be warned!
— The writer is the Managing Director of Vianta, which works with SMEs in raising bank finance.