UAE banks' personal loans rise sharply

The growth in personal loans for UAE banks during the first quarter of the current year was more than double the growth their gross loans portfolio witnessed during this period.

With falling volume of corporate loans and rising pressure on margins on corporate loans, retail banking has become the real breadwinner for many banks helping prop up the profit and loss statement.

Many banks are charging heavy service fees on retail banking operations like the penalty for not maintaining minimum balance, balance enquiry charges, fee for servicing current or savings accounts, ATM charge, fee for cheque books, etc.

The interest charged on personal (consumer) loans does not have any correlation with corporate rates. Though this may be blamed on the long-term nature and the fixed interest aspect of the loan, many bankers admit that the rates in this segment are much more than what they should be.

It is the personal loan portfolio which has helped many banks last year to save their face on the profitability side. Figures show that while gross loans increased by 1.3 per cent between January 1 and March 31, 2002, personal loans went up by 2.75 per cent.

While gross loans expanded from Dh140.545 billion to Dh147.130 billion during this period, personal loans grew from Dh32.493 billion to Dh37.205 billion.

The picture was much more prominent for the full year 2001. During this period, while the gross loans portfolio improved by five per cent, personal loans for business and consumption purpose jumped by almost 14 per cent.

Interestingly, the bulk of the personal loans are secured by securities or real estates, deposits, etc.

While personal loans constituted more than 23 per cent of gross loans in 2000, this has gone up to almost a quarter (24.93 per cent) during 2001.

During the first quarter of the current year, the personal loans content further went up marginally to 25.29 per cent of total loans, pointing to the fact that this is an ever growing area.

According to reports, the Federal National Council (FNC) has already alerted the apex bank on the negative impact of the growing personal loan scenario in the country. The FNC is said to be worried about the growing trend in personal loan defaults.

A recent Standard & Poor's (S&P) report stated, "Banks are currently focusing on the retail business, where margins are still high given the limited credit risk carried.

"In addition, the banks in the UAE are trying to increase the proportion of fees and commissions in their revenue structure. Banks are moving away from traditional corporate lending, where margins have dropped considerably, and do not represent a sufficient cushion against corporate credit risks.