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Defaults among small and medium enterprises (SMEs) in the UAE have gone substantially lower this year after banks became cautious in lending to risky small businesses over the last couple of years, according to a banking industry executive.
"Defaults have actually decreased in 2018 as compared to the last two to three years across the board. And same is the case with the Mashreq bank as well; there are no published figures as such industry-wide but I can tell you that the default rate has come down very significantly from where they were in 2016," said Rohit Garg, head of business banking for mortgages and remittances at Mashreq Bank.
"Banks are not shy of lending; whenever there is an opportunity, banks do lend. I think the banks have stopped unsecured and indiscriminately lending to SMEs. If you have a good business model and you're putting equity, banks are willing to do business," he said during an interview with Khaleej Times.
"The reasons is that banks had a pretty difficult last three years on the SME side during. A lot of businesses could not sustain, so the banks had pretty large credit losses on account of that. You cannot sustain any business where you have 15-20 per cent loss rate. Lending for the sake of it and ultimately getting 15 per cent credit loss is not going to sustain you in the long run," he said.
"On one side, banks were more cautious in terms of lending. But also a lot more customers have adjusted to the new reality and are a lot more cautious too in spending," Garg said.
On the startup side, he revealed that banks are not funding because they are a risky investment and there is a need to have a separate venture capital or guarantee scheme for them.
"Startup lending is a specialised lending. When you're lending money to any obligor, the bank expects that the money will be paid back with some interest rate. And part of that interest will go towards paying the depositors who money was paid actually. And then the bank will cover the cost."
"In startup funding, it is far more risky because nine out of 10 startups will fail but one startup will give you fantastic returns. And that is how venture capitals funds work. That is not really for everyone unless you have a specialised venture capital team. There are a lot more risks to startups which are different to small businesses. The SMEs department of the banks are not geared towards measuring that," Garg said.
With Emirates Development Bank, the UAE Ministry of Economy has actually started that guarantee scheme for startups. That should stimulate the startup lending, he added.
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