Central Bank will review controversial curbs on retail lending

The caps are designed to dampen the borrowing-fuelled consumerism that made the financial system vulnerable. But customers complain that the rules curtail their ability to take out loans.
Some customers have complained to the Central Bank that the rules have curtailed their ability to take out loans and extend overdrafts. Pawan Singh / The National
Some customers have complained to the Central Bank that the rules have curtailed their ability to take out loans and extend overdrafts. Pawan Singh / The National

The Central Bank plans to review controversial caps on retail lending at the start of next year as concerns mount that the rules may be able to be circumvented.

It is collecting feedback about the regulations, which brought to an end an era of hefty loans and large overdrafts.

"The Central Bank is still receiving feedback from banks and customers. We will collect all of this information until it gets [to] such a time to study it and submit it to the board of directors to see if we need to amend the regulations," said Saleh Al Tenaiji, the senior manager at the Central Bank's banking supervision and examination department.

Some of the feedback was from lenders wanting to clarify methods for calculating lending to customers, he said.

Introduced at the start of May, the regulations cap the amount banks can lend to customers at 20 times their salary and set the period of loan repayment at 48 months.

Since then, some customers have complained to the Central Bank that the rules have curtailed their ability to take out loans and extend overdrafts.

Banks too have been hurt by the regulations. Loan income fell in the second quarter for some lenders.

To what extent the rules are curbing credit growth is tricky to determine.

Total loans and advances dipped in May compared with April, but they rose 0.7 per cent in June, Central Bank data show.

Analysts have also said that some banks may be able to get around the rules as they seek to maximise profits. For example, lenders could offer unsecured loans to customers to cover a down payment for a car purchase or a mortgage.

"There's almost always a way banks can circumvent the rules," said Raj Madha, a regional banking analyst at Rasmala Investment Bank. "The Central Bank has to hope banks believe in the spirit of the regulations and abide by them."

The Central Bank introduced the caps to curb the lending-fuelled consumerism that made the financial system vulnerable to a credit crunch once the global downturn struck. It hopes the new rules will protect both customers and lenders from a repeat of the wave of consumer debt that soured during the downturn.

"When people take out a loan they need to be able to pay it back adequately and within a suitable time," said Mr Al Tenaiji.

Within the property market, the Central Bank is also planning new rules to ensure different borrowing limits for first-time buyers and investors. Those rules will be intended to curb excessive lending to speculators.

Attempts by other central banks to bring in caps on retail lending have achieved mixed results. The UK government tried to bring in similar rules in the 1970s but soon abandoned them.

Regionally, Qatar implemented similar rules this year, capping the amount people can borrow to no more than 2 million rials (Dh2m) on loans with a maximum maturity of six years, and 400,000 rials on loans of no more than four years.

In Europe, the banking sector relies on a sufficient supply of information to banks about customer-credit risk, as well as high levels of transparency to customers about banking products, say analysts.

Plans for a credit bureau in the UAE are at a more formative stage. Regulations are in the process to require banks to supply credit information about their customers to a central database.

Such a bureau should help banks to make better informed decisions about lending to customers.

tarnold@thenational.ae

Published: August 21, 2011 04:00 AM

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