Enhancing the savings potential of individuals in Oman and improving asset quality of banks have been a key area of focus for Oman's banking industry in recent times. In the last one year alone, the Central Bank of Oman (CBO) has introduced a number of regulations such as reducing the interest rate ceiling on personal loans to seven per cent and placing a cap on the debt-to-burden ratio (or the EMI paid by the borrower) at 50 per cent of one's monthly salary for personal loans and at 60 per cent for housing. The tenure for loans was capped at a maximum of ten years for personal loans and 25 years for housing. All of these measures were aimed at reducing the debt burden of consumers and encourage banks to offer more credit to finance productive projects.
According to the latest CBO reports, personal loans in Oman's banking grew 15 per cent in 2012 to RO5.87bn, not slowing much from the 17 per cent growth exhibited in 2011. For all the four quarters of FY'12, personal loans have gone almost a per cent over the stipulated 40 per cent mark in the total credit portfolio. CBO tightened the reins further in March this year by reducing the ceiling on personal loans to 35 per cent from 40 per cent, while that on housing was raised by five percentage points to 15 per cent.
Currently, the commercial banks have a ceiling of 50 per cent for consumer loans (inclusive of personal and housing), while the remaining 50 per cent is for corporate. "CBO considers this as a reasonable measured deregulation/option and does not want to raise such exposures (for consumers and corporate loans) beyond 50 per cent of the total credit. There will be less consumptionoriented expenditure and housing loans provide for lesser debt burden. Banks have to contribute to productive endeavours and economic development and have diversified assets," says H E Hamood Sangour al Zadjali, executive president, CBO.
Banking executives have admitted that this new rule will have a stronger impact than last year's measures on the industry's overall profitability and loan book growth, as a five per cent reduction is quite drastic, with a majority of the banks highly leveraged towards personal loans in retail lending. The positive effects, however, on the banks' assets and balance sheets that are seen kicking in within the next couple of years far outweigh the near-term impact. Bankers admit as consumers increase their investments in long-term assets like housing boosting mortgage loans, with benefits trickling down to the real estate industry as well.
Short-term impact
Executives from Bank Sohar and bank muscat point out that the biggest concern will be for those banks that have already touched or are near the previous 40 per cent ceiling limit on their personal loans portfolio. Bringing down this exposure to 35 per cent is going to be no small feat. "The timeline for banks to bring down their personal loan portfolio to 35 per cent, if they have already reached 40 per cent, is not clear," says Amjad al Lawati, head of products and services management, bank muscat.
According to CBO, these commercial banks will just have to wait till they reduce their exposure to personal loans before they start lending on housing. As such loan book growth will slow down for these banks for the year.
"Banks that have already hit the earlier ceiling limit on personal loans will have to bolster their corporate loans to reach the current ratio. But to bolster that, they will be looking to reduce interest rates further and the competition is already very fierce in this segment. The lowering of interest rates on the corporate side and curtailing retail lending will affect profitability. The impact on the profitability of those banks that need to reduce their exposure, will in turn affect the overall profitability of the entire industry in the near term," says Dr Mohammed Abdulaziz Kalmoor, CEO, Bank Sohar.
An executive says Oman's banking industry is yet to recover from last year's reduction on the personal loans interest rates that made business prospects challenging, so this new regulation might make the business environment more difficult in the near term for the banking industry. In April this year, National Bank of Oman (NBO) reported a 11 per cent drop in Q1'13 net profit that fell to RO8.59mn, citing low income fee from personal loans disbursements due to the change in debt-to-burden ratio after the first quarter last year. "It's a prudent move and we commend CBO for the decision. Ahli Bank's strategy and business growth plan goes hand in hand with the new regulations and it will be beneficial for the bank in both short and long term," says Abdulaziz al Balushi, CEO, Ahlibank.
In view of the new ceiling limits, executives from Bank Muscat, Bank Sohar and Ahlibank say their institutions still have sufficient room to lend on both the personal and housing loans sides. "Total consumer and housing loans can reach 50 per cent. We are well below this level but have good growth in both corporate and retail lending and have plenty of money to lend in a prudent and customer focused manner. We have the best housing loans product and service on the market offering a five day turnaround from receipt of application to paying out funds. Our position is very healthy," says Tony Mahoney, CEO, Bank Dhofar.
Even those banks that have room to increase their lending on the mortage side do not expect to see a substantial increase in mortage loans for 2013. "My view is that in the short term this is going to be a very positive move as it will lead, for the first time, to competition between the banks in a productive sector. The banks will be competing to grow the business and at the same time create value for their clients. I also believe that paying monthly installments towards a housing loan should be viewed as an investment and savings opportunity for the customers as it creates a tangible investment that appreciates in value over time," says Balushi.
"The short-term impact will be limited as the overriding issue for home ownership in Oman is centred on affordability. With the banks financing only up to 80 per cent of the total value, many individuals find it hard to raise the remaining amount. There is a dearth of genuine affordable housing in each sector of the market. General property prices in Muscat could, and should therefore face a small correction to absorb the large demand for housing. The benefits of the CBO's recent decision are for the medium to long term and these benefits will be substantial as the stability of the financial industry strengthens," explains Benjamin Cullum, general manager, Hamptons Oman.
Those like Bank Nizwa, however, point out that there will be no impact on the loan books or profitability of Islamic banks. "For us it is quite a positive thing that such regulations have come about during the initial days of our operations. We can concentrate on investing in more long-term assets and have sufficient room to grow in both lines," says Dr Jamil el Jaroudi, CEO, Bank Nizwa.
The silver lining for the banking industry this time around is that no major impact was seen on the performance of their stocks listed on the MSM since this regulation was announced. The valuations of the stocks are already quite low and the market has discounted this negative news to an extent, says Kanaga Sundar, head of research GBCM.
Long term benefits
Investing in tangible assets like housing, which have good potential to appreciate in value in the long term in Oman, enhances the asset quality of banks as well as the savings potential for consumers. "In the medium to long term, the new regulations will help to diversify the bank's portfolio and move away from depending on unsecured loans to more secured loans, as a result the NPA ratio will decline substantially and we will witness a positive impact on the quality of assets and on profitability," says Balushi.
"In the long run, this is good for households as well as for the economy. Consumers generally tend to borrow a lot more than what they can afford and pay back much more than the original loan value amount in personal loans due to the interest rates," says Kalmoor. The interest rates on housing loans are a lot lower with the industry average pegged at 4.5 per cent.
Property values in Oman are expected to appreciate substantially over the next two to three years, according to real estate firms. Says Sudhakar Reddy, chief executive officer, Al Habib, "The recent decision by CBO in raising the ceiling on housing loans will give a fillip to the housing market and create strong demand for housing in the near term. Cullum says real estate agents in Oman could see profits increase over ten per cent in a couple of years, as demand for residential valuation and investment consultancy services steadily increase.
"The increased focus on mortgage loans will result in developers aligning more with banks and the banks will prefer completed properties. There might be some off-plan deals with experienced developers," says Chris Steel, managing director, Savills Oman.
To ensure that the increase in these loans do not lead to a staggering number of loan defaults, CBO has stipulated that no innovative products or schemes are allowed in housing loans. Fixed rate mortgages are the norm. Hence, the mortgage industry will continue to be dominated by banks for the foreseeable future in Oman.
Bankers say banks and consumers are well protected against losses by the 80 per cent loans-to-value ratio and the 60 per cent debtto- burden ratio in housing loans that are seen eliminating the risk of foreclosures. Both Kalmoor and Jaroudi point out that banks have to exercise caution and apply the normal prudential measures such as the extension of financing up to 80 per cent only of the loan and to consider such things as employment stability, the age of borrowers and the true appraisal of the collateral.
At a time when banks abroad are in serious turmoil due to high levels of non-performing loans and toxic assets, CBO's recent regulations regarding the personal and housing loans are perhaps a prudent measure in ensuring strong and steady growth for the industry for the foreseeable future.
© businesstoday 2013
