Banks adopt softer approach

Lenders take softer approach to customers with outstanding debts to stem a sharp rise in unpaid credit card bills and loans.

DUBAI // Major international banks are taking a softer approach to customers with outstanding debts, in an effort to stem a sharp rise in unpaid credit card bills and loans. While they have reassigned scores of employees to debt collecting, they have also introduced some unusually conciliatory measures to aid the heavily indebted.

These include readily reducing interest rates, extended grace periods on loan payments, and telephone help lines offering financial counselling. They are also using sophisticated computer modelling to analyse customer profiles and spending patterns, and being more active in contacting those who they think are in danger of default. The moves are intended to be co-operative, not punitive, bankers emphasise, although some banks are still unilaterally slashing limits on credit cards and raising fees.

Redundancies and pay cuts have led to large numbers of customers fleeing the country and abandoning their financial obligations, senior bankers say, leaving behind mountains of outstanding debt. In the case of HSBC, one of the country's largest lending institutions, with about 300,000 retail banking customers, absconding residents, or "skips", account for half the bank's bad debt. "We have experienced a rapid increase in skips since the autumn of 2008 and there are few signs that this is abating," George Lennox, the head of PFS credit at HSBC Middle East, said in an e-mail statement.

Most had absconded to India, the Philippines, Pakistan or Britain, he said, and typically had worked in "areas of the economy most affected by the current conditions, ie construction, sale of property, etc". Some analysts, however, believe the banks' moves may not be enough to staunch the flow of absconders and the associated rise in defaults for some time. "We expect credit card defaults will be sharply higher in the second quarter, and non-performing loans from unsecured lending sharply higher in the second quarter," said Raj Madha, a financial sector analyst at EFG Hermes. Banks' second-quarter financial results should be available next month.

There was also anecdotal evidence that some employees might not have received their final salaries, Mr Madha said. "If this is widespread, then clearly those people would be feeling aggrieved and would be far more likely to skip without clearing their outstanding financial obligations." Bankers acknowledge the difficulty of deterring absconders, and admit tracking them down can be equally challenging.

"Specifically in the UAE, the situation of over-leveraged customers is very high," said Sanjoy Sen, Citibank's head of consumer banking in the Middle East. "But what makes this market different is that there is no regulatory framework in terms of credit bureaux, and there is a high population in terms of expats." Indeed, partly because of the scale of the problem, officials at some banks conceded that they had not introduced additional measures to address the issue.

But for those that have, trying to seek out debt-saddled customers from a non-punitive perspective is considered the best option. "The whole approach is that you help a customer through a credit cycle - you don't push him into a corner," Mr Sen said. Citibank, for example, has recently bolstered existing programmes such as Credit Shield, intended to help customers who have been made redundant or who have health issues to meet their credit obligations.

It has also begun redeploying employees to its debt-collection arm and giving them added training in such courses as "soft" negotiating. "We've always had this, but we never promoted it actively," Mr Sen said. "But since the beginning of this year, we've been doing it more proactively." Some banks are trying unconventional measures to help debtors overcome social stigmas. HSBC, for example, recently introduced telephone helplines offering confidential financial counselling.

It is also more actively profiling industries most affected by the recession, said Mr Lennox. "We carefully look for employers who are laying off staff and try to work with those companies to identify our customers who may be leaving. We then make contact and work out the best solution. "We have operated these programmes since October 2008." The outflow of debtors could soon be compounded by a possible population exodus.

According to a report released yesterday by Standard Chartered Bank, there is a significant risk of "a major population outflow in the upcoming months". "Families with school-age children may wait until the end of the academic year before moving, and the impact could be substantial," the report said. "This would have a direct impact on the retail sector as well as real-estate prices".
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