Monday, November 9, 2009

Headlines Say UAE Central Bank to Tighten Regulations - But the Real Story is Personal Loan Losses Loom

Under current CBUAE regulations a sub-standard loan is defined as one on which debt service is 180 days or more late.  This regulation dates to 1988.  Other countries in the Gulf have a 90 day time frame.  The latter is pretty much the international standard.

The National in Abu Dhabi is reporting that the CBUAE intends to tighten its requirement and bring UAE regulation in line with the 90 day standard. 

This report sounds rather ominous.

The immediate thought is that if these new rules are adopted, the amount of non performing loans will balloon.

But is that the case?

The article states that most UAE banks are using the more standard 90 day time frame.  A quick check of several banks' financial statements shows that to be the case.

What I think is more important in this article is some information about personal loans  that is tucked away in the middle of the article:  the estimate of a  potential 10% non performing rate.

One might quibble about the implication that credit bureaus (and quibble I will in a bit) are largely responsible for bad loans, but the ticking time bomb that personal loans represents is unmistakable.

Some signs of distress:
  1. A group of Kuwaiti MPs is pushing for the government to buy Kuwaiti financial institutions' personal loan portfolios (Kuwaiti citizens' loans only) to relieve distress of the average Kuwaiti.  Estimates of the cost of doing this range from KD 2.2 billion to  KD 6.5 billion depending on which loans are included.  The appeals are usually accompanied by statements that the cost of living is higher than citizens' income and so borrowing is the  only way they have been able to make ends meet.  This AlQabas interview with Nasser AbdhulMuhsin AlMarri, Deputy Chairman and Managing Director of Noor Investment Kuwait, is one example.  See the first question.
  2. Living beyond one's means through the use of debt is not uncommon.  In one country I'm familiar with, a lot of the locals I know at the junior level have debt service ratios over 70% of their monthly income - meaning that to make the minimum required payment each month, they should pay the lenders 70% of their salaries.
  3. As I've noted in an earlier posting, the Central Bank of Bahrain issued a regulation to set a maximum that banks could lend consumers at 50% of gross monthly income because it was concerned citizens were getting in over their heads.
  4. Cars in the Dubai airport parking lot. 
    Some signs of lending practices that might make a sub-prime lender blush (though I'm told these folks are made of pretty stern stuff);
    1. A local I knew was in over his head with credit cards.  With some help he negotiated revised payment terms and a lower interest rate.  Once this was done, one of the banks where he had been max-ed out and which had frozen his credit card wrote him a letter thanking him for clearing up his debt.  And now since he was a customer in good standing, they were not only re-instating his credit card but increasing the limit.  Yes, while his rescheduled debt sat in their work-out group's portfolio.  By the way this bank has won several awards in the GCC for banking excellence of one sort or another.  Marketing seems a natural category, though I think the awards were for something else.
    2. I received a couple of SMS's from that very bank promising me that if I transferred my outstanding credit card balances from another bank to their fine institution not only would they happily accept my balances, they' also give me a credit line equal to 110% of those balances.  That way I could "afford" to spend a bit more.  Since my phone was registered in a company not a personal name, it seems fairly clear that this bank was happily blanketing the market with mass SMS mailings.  
    3. One of my local friends advised me that rotation of creditors was a common strategy. Max-out at Bank A.  Go to Bank B to get a larger line.  Max-out at B. Go to Bank C.  Eventually one winds up back at Bank A and notes one's sterling credit.  Not only did I pay in you (Bank A) and Bank B in full, but look Bank C gives me  this  big a line.  I've got to be a really great credit.  To get me to move to your esteemed bank,  you'll just need to give me a bigger line.
    4. I've seen outdoor billboards from one Shari'ah compliant lender offering to lend me and everyone else who passes by 95%  of the price of a new home.  Not much margin for error there if the price of one's new house drops just a bit.   To be fair, they no longer offer this level of financing.
    5. There were ads from another retail bank offering to make a loan for a vacation with five year repayment terms. 
    So now to the quibble.

    Yes, a functioning credit bureau (with access to all borrower data) will make my job as a banker easier.

    But, how much help do I need?  Do I need to be as smart as Gail Trimble to figure out:
    1. Credit cards aren't used to purchase houses.  Or cars.  If they are, that's probably not a sign of good creditworthiness.  By and large they are being used for consumables.  If a prospective borrower already has a very high ratio of existing debt to income, that's also probably a sign that he or she is living beyond his or her means.
    2. If this new customer is such wonderful business, how come my competitor is letting him slip away?  If the price of luring this customer to my bank is the simple act of increasing his/her credit line, whey doesn't his existing bank do this?  Am we really that much smarter than they are?  Really?  If this is such a great idea,  then why don't we do this with our existing customers?  After all, we do it with new customers about whom we have even less data.
    By the way a tip of the hat to the folks at Emcredit  the Emirates credit bureau.

    1 comment:

    Abu 'Arqala said...

    US Consumer Debt Service Ratios

    http://www.federalreserve.gov/releases/housedebt/