Credit card limits trimmed down to size

Retailers and customers face less joy this festive season as the downturn reduces credit card limits and withdrawal amounts.

Retailers and customers face less joy this festive season as the downturn continues to spread and leading banks across the country, including Standard Chartered Bank and HSBC, lower credit card limits and reduce amounts available for withdrawals. Analysts expect reduced consumer spending to hit the economy as banks show no signs of relaxing lending requirements despite measures by the Central Bank to provide liquidity.

"On one hand they want to reduce demand on the banking system, but on the other hand it reduces consumption during the holiday season," said Basil al Bustany, the chief economic adviser of the Department of Planning and Economy. "Maybe the policymaker wants to reach certain immediate targets and then release [the measure]." He added that reduced credit card limits would allow the banking system to be more selective in extending credit during a shortage of liquidity, aiming to provide lending for investment purposes rather than "cars or furniture".

Many bank customers have had borrowing limits slashed - often without warning. Earlier this week, Standard Chartered Bank said it had reduced the credit limit of some card holders to Dh1,000 (US$272), while some HSBC customers found their limits cut by as much as 80 per cent in the past few days, without warning. In addition, some banks have reduced the amount of money that can be withdrawn from ATMs by credit card.

Store owners face the prospect of the measures dampening retail sales. "Reduced credit card limits will definitely impact consumer spending during the holidays, a period during which retailers usually generate a big chunk of their annual sales," said Sofia al Boury, a banking analyst with Shuaa Capital. She added that in a banking system under pressure, particularly one that also lacked a national credit bureau, reducing credit card limits was a sign of banks being more cautious.

Analysts believe this is a temporary initiative that will allow banks to show they have cash on hand at the end of the year. "[Reduction of credit limits] is a very short-term measure, done at year end, which means that banks will be doing a lot of window dressing to display as much cash on their balance sheets to look as liquid as possible," said Nasser Saidi, the chief economist at the Dubai International Financial Centre. "What we would like to see as the situation comes back to normal is credit extended to longer maturities, which will happen in the new year."

Thimal Perera, the regional head of credit cards at HSBC, said: "Some of our customers have been informed that their credit limit has been reduced recently in order to ensure that they can afford to repay their credit card debts at a time of considerable uncertainty around the world." The UAE is set for a lean Christmas, with reduced consumer spending combined with low oil prices and a fall in net exports.

When asked if reducing credit limits was a typical or expected measure during times of financial distress, however, Dr al Bustany countered that this was a unique case. "There is no rule on what measures can be taken in times of such crisis; this is a special case," he said. "In a situation like this, everything goes." [e-mail]