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Dubai: UAE banks could further tighten lending norms despite the improvement in economic conditions and declines in loan loss provisions last year.

A combination of factors ranging from decriminalization of cheque bounce cases, legal difficulties involved in loan recoveries and a potential spike in non-performing loans following the exit of UAE Central Bank’s support measures have turned banks more cautious on loans not backed by sufficient collateral.

Thai is likely to reduce lending to individuals, SMEs and lower rated corporates, especially those that opted for loan deferrals and restructurings in the recent past.

Focus on blue-chips

A trend seen last year was that while the top banks in the country preferred to lend to government related entities (GREs) and larger corporates, smaller banks too increased their exposures to corporate clients.

“While loan growth was flat, offset by customer pre-payments, (this) masked uneven trends across the banks [in lending], the Abu Dhabi-based banks reported single-digit loan growth, mainly driven by growth in large corporate and government-related entities, while the loan books of the Dubai-based banks contracted because of early settlements,” said Nitish Bhojnagarwala, Vice-President - Senior Credit Officer at Moody’s.

Bankers say their lending mix will eventually balance as risk perceptions change over time. “We have seen the mix of our lower margin businesses grow more rapidly than the growth in our higher margin products that were more impacted by the pandemic,” said Raheel Ahmed, CEO of RAKBANK.

“However, going forward we do expect this trend to normalize as we seek growth across all our key business lines.”

Broad indicators like the latest credit sentiment survey of the CBUAE too points to tightening credit standards for smaller firms. The survey notes that in terms of credit availability, credit standards for business loans remained broadly unchanged [in Q4-2021]. This is attributable to a moderate tightening in the supply of credit to SMEs offset by a moderate easing in credit availability for large firms.

Preference for secured lending

Many banks are looking at opportunities to increase their share of collateralized lending, where the bank has recourse to borrowers’ assets. Innovative structures are being worked out to hold borrowers assets such as real estate, financial assets and credible receivables as security for loans.

Bankers are also using mezzanine financing to reduce the risk of defaults. Mezzanine financing is a hybrid of debt and equity financing that gives the lender the right to convert the debt to equity in the company in case of default.

“Purely from a risk management perspective, there is preference for secured lending to unsecured,” Varouj Nerguizian, Group CEO of Bank of Sharjah.

Fear of bad loans

Bankers say they haven’t forgotten the huge spike in bad loans mostly in SME loan portfolios between 2014-18 that led to huge provisions.

Although the impact of pandemic on loan impairments were largely contained by loan deferral programmes and restructurings supported by the CBUAE’s Targeted Economic Support Scheme (TESS), there is a fear some of these deferred loans could be impaired in the future.

“We think part of the deterioration will come from deferred exposures once the CBUAE lifts support measures and companies in still vulnerable sectors are reclassified,” said Puneet Tuli, an analyst at Standard & Poor’s.

Sectors such as real estate, construction, hospitality, consumer-related sectors, and SMEs are expected to take longer and they likely to be the main sources of loan delinquencies.

Slow loan growth

Data for thw Top 10 UAE banks analysed by Alvarez and Marsal shows growth in aggregate loans and advances increased by quarter of a per cent to 1.7 per cent in 2021, while deposits grew by 6.7 per cent keeping the overall loan growth below pre-pandemic level.

Data from 2021 show UAE banks remained cautious in originating new loans despite higher liquidity. Analysts say that it is likely that the banks are holding reserves considered too high for the risk profile of their portfolio, given recent credit trends.

Residential mortgage loans contributed about 20-25 per cent of residential real estate demand in Dubai.