Banks in UAE no longer demand blank cheques

Dubai: Banks in the UAE no longer ask for blank security cheques against unsecured lending, but the amounts written on these cheques vary depending on the risk perception of the banks and credit history of customers.

Most banks in the country ask for security amounts ranging from 100 to 120 per cent of the loan principal. “As security against personal loans, we take cheques amounting to total loan amount plus 20 per cent of the principal amount,” said the branch manager of a leading Dubai based bank.

For credit cards too most banks take, additional 20 per cent over the credit limit as security amount. Bankers say the additional 20 per cent is taken as security to cover the interest, legal costs and administrative expenses in the event of a default.

Bankers said although 20 per cent plus the principal is the generally accepted standard for security cheques among banks, it could vary depending on the risk perception of the bank, credit worthiness and credit history of the customer.

There are cases, a number of banks and credit card companies taking just the credit limit of a card as security the amount. Bankers say, if the credit history of a customer is good, the amount on the security cheque could even fall below the credit limit on cards.

Additional security amount

“We have cases where customers have issued us cheques covering just the credit limit of the card at the time of subscribing to a credit card. Over the years we may increase the credit limit without seeking additional security amount to cover the increase in credit limit,” said the operations manager of a Dubai based credit card company.

Bankers said additional security amount is demanded in cases where the credit history of the customer is not up to the internal standards of the bank or the customer belongs to a higher risk category. The launch of Etihad Credit Bureau and the widespread use of analytics in risk assessment make it possible for banks to assess credit risks more accurately.

“In unsecured lending credit pricing and demand for security are functionally related to credit risks and the prevailing economic environment. Going by the experience of a significant rise in non-performing loans in 2009 and 2010, banks are very cautious in assessing risks,” said head of retail credit assessment and analytics department of an Abu Dhabi based bank.