Banks are lobbying the Central Bank to relax impending limits on lending to individual companies, with bankers warning of "painful" consequences for the economy if the plan goes ahead.
Bankers fear that credit could dry up as institutions review their loan books and shrink exposure to local government entities by a deadline of September 30.
The rules set 25 per cent of total capital as the maximum amount that banks can lend to an individual company, and an aggregate 100 per cent total for lending to all arms of an emirate's government.
Many lenders, including Emirates NBD, are currently in breach of the limit, said Rick Pudner,Emirates NBD's chief executive, in a conference call with reporters on Wednesday.
"It's obvious when you look at our book [that] our exposure to the Dubai Government exceeds the exposure limit," he said.
But the Central Bank said lenders had been consulted prior to the publication of the latest circular on April 4.
"Whenever the Central Bank issues regulations, there will be some banks who are not compliant for a certain period of time for their own reasons," said a Central Bank official, who asked not to be named. "But we often do investor consultations and these views had been given in that stage. We don't send regulation to banks affecting their business unless they have been consulted already."
The rules were recommended by the IMF this year as a means of protecting the financial system from the risks of concentrating bank lending among government-related companies.
Credit growth has been slow since the financial crisis pushed a number of companies into debt restructuring, with the UAE's biggest banks reporting modest new lending during the first three months of this year in their latest financial statements.
Much of the existing credit growth is driven by lending to government entities. Bankers have complained that the country's laws, which criminalise bounced cheques and limit the use of a company's assets as collateral for lending, make it difficult to profitably lend to all but the strongest entities.
Complying with the new limits would make underwriting new loans more difficult for banks, said Ahmad Alanani, the senior executive officer at Exotix, an investor in illiquid securities.
"These Central Bank limits, if they had to kick in today, would be quite painful for a lot of the banks and the overall economy," he said.
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