With large loan deals having practically disappeared from the market, and the bleak prospects of increased provisioning weighing heavily on UAE banks, many lenders have increased their focus on consumer banking and small & medium enterprises (SME) segment that assure higher returns.
The loan growth has been flat for the last two years, and in the case of personal loans, the net figure stands at the June 2009 level. Though there has been a 7 per cent growth in loans and advances during the first five months, the personal loans showed a marginal drop of 0.6 per cent during this period.
There are estimates done by experts that the income of UAE banks may be affected to the extent of 33 per cent due to the new provisioning required during the remaining half of the year. More than that, the curb on service charges across the board and the requirement of down payment in auto loans will have their share of drain on the income of banks, whose fee and commission income used contribute a lot to the profitability.
The foreign banks such as HSBC and Citi have been very active on personal loans and this is manifested through the advertisement campaigns they have taken out through the media recently. HSBC has advertised that personal loans are available for rates as low as 6.99 per cent though this is available only for premier customers and that too when the tenure is not more than a year.
Moreover, HSBC has not only slashed the processing fee by 50 per cent for these loans, the minimum salary requirement has been reduced to Dh7,500. However, for the ordinary borrowers with longer tenure of loans, the interest could be as high as 10.99 per cent on reducing balance. Banks are encouraging shorter-term loans as is seen by the Citibank ad also. Citibank advertisement says, "Get a Personal Loan equal to your monthly salary at just half the interest rate," though the rate is not mentioned.
The Citibank terms and conditions clearly state, "Loans of up to one-time monthly salary to be repaid in equal instalments over 12-24 months. Minimum (fixed) monthly salary of Dh10,000 required to avail the offer and higher loan amounts are available at prevailing interest rates and loan tenure as per standard offer."
High interest rates
Some banks seem to be cashing in on the fact the Central Bank in its recent tightening exercise has left interest rates regime untouched. Most banks, including, Citibank, Mashreqbank and RakBank are charging rates in the range of 15 to 26 per cent for their SME loans though the rate displayed by them are around half of that, by expressing it in terms of 'Flat rate'.
There are experts who strongly believe that banks are not supposed to display rates in flat rate; rather they have put it in 'reducing balance'. "Giving the rates in 'flat' could mislead the unsuspecting customers as the rates look about half that is really being charged by the bank. Central Bank needs to clamp down on this aspect too," financial controller of a bank said.
The high interest rates charged by the banks was highlighted by the private sector at a recent meeting organised by the Central Bank and attended by a delegation of Abu Dhabi Chamber of Commerce and Industry (ADCCI), Abu Dhabi Council for Economic Development and representatives from private sector in Abu Dhabi.
The representatives referred to the change of loan agreement regulations and interest rates on loans by banks without consent of borrowers, especially in home loans, calling on the Central Bank to set interest rate ceiling on loans. "The inreasing delinquency rate in personal loans and credit cards has forced banks to make good for the loss by increasing rates on loans. Morever, the Central Bank through its recent directive has closed a lucrative income window by restricting fee and service charges," said the reytail head of an Abu Dhabi bank.
He said acquiring new customers has become practically impossible with the Central Bank ban on telebanking, especially those using cold calling. He said the Central Bank is working on plans to bring in curbs on interest rates as has been done in Oman and Kuwait.
Cash Back is new bait
The interest rate scene on credit cards is absolutely chaotic. The rates could be anywhere around 36 per cent [for most banks] and it is strictly expressed in 'monthly terms'. While it is well known in the market that the merchant discount rate is around 2 per cent, one has every right to wonder how some banks are able to offer cash backs as high as 5 per cent and upwards especially on overseas spend.
"It is always better to check at what rate the forex conversion is made and how much is the fee charged forex conversion when the overseas spend is billed to the customer. This is one area which is overlooked by the customers or being taken for granted," a former head of retail banking told Banking & Business Review (BBR).
© Banking & Business Review 2011
