Muscat: Recent restrictions on commercial banks to confine repayment of personal loan to a maximum of 50 per cent of borrower's salary as equated monthly instalment (EMI) and a maximum loan tenure of ten years are expected to ease the burden of borrowers to a large extent and thereby reduces chances of an imminent debt trap, a top-level official of the Central Bank of Oman told Times of Oman.
The Sultanate's banking regulator last week said commercial banks cannot deduct more than 50 per cent of the borrowers' salary as EMI for personal loan, 60 per cent for housing loans, a maximum repayment period of 10 years for personal loans and 25 years for housing loans.
"We do not like to (over) burden the borrowers with a high amount of loan and for an unreasonably long period of time. A ten year entitlement will be adequate for the requirement of a borrower,- said Hamoud Sangour Al Zadjali, executive president of CBO.
"It (the new stipulation) will make a balance between the needs of the borrower and is also in line with the repayment capacity.-
Sangour said banks were offering even up to 60 times of the borrowers salary with a repayment tenure as high as 15 years. From a macroeconomic perspective, personal loan restrictions will enable the regulator to manage systemic risks to the banking sector and limit personal indebtedness levels.
He said the new regulation, which is applicable only for fresh loans, is effective from the date of issuing the circular last week.
A highly placed official at the Standard Charted Bank in Oman said the personal loan burden issue has been growing in Oman because 'banks have been offering loans at loose terms.' Banks were also very liberal in offering top up facilities. In order to check this unhealthy practice, CBO said topping up facility can be given only after two years of repayment or after paying 50 per cent of the existing loan.
"Consumer or personal loan issue has been an evergreen problem in Oman, as many borrowers use it for long-term purpose.- Personal loans, across the globe, are taken for a period ranging from one to five years.
Few years ago, CBO has convened a meeting of bankers to bring in self regulation, to ease the repayment burden of borrowers as well as to reduce default risk. "This went on for sometime. However, it was proved to be a failure,- noted the Standard Chartered Bank official, who does not want to be named. If the restrictions were not brought in now, the whole issue will go beyond the control and turn into a major default crisis.
Saying that the restrictions will help maintain the strength of the financial system, the official noted that profitability of banks will be affected in the short run. "However, the default rates will also come down, which is a healthy sign and good for banks in the long run.-
However, Sangour said the new measures are unlikely to affect the profits of banks as they can still offer 40 per cent of their total credit as personal loan. "Since the number of young people entering the job market is increasing, there is a growth in demand for personal loan.-
"Personal loan growth has accelerated since the second quarter of 2011 and has seen double digit year-on-ear growth, and accounted for 38.4 per cent of total lending in the second quarter of 2012,- EFG Hermes said in a research note.
The aggregate personal loan portfolio of all banks grew by 16.8 per cent to touch RO5 billion by end-2011 (out of a total RO12.5 billion bank loan portfolio) from RO4.28 billion a year ago. Consumer loans are the key revenue drivers for Omani institutions due to high interest margins.
The CBO in March brought down interest rate ceiling on new personal loan to seven per cent from eight per cent, offering relief to bank borrowers. CBO stipulates an upper ceiling of 40 per cent of a bank's total credit portfolio as personal loan and another 10 per cent as mortgage finance.
© Times of Oman 2012
