Banks tighten due diligence to check bad debts

A number of banks in the UAE are preparing for lower credit growth and are implementing stricter due diligence on both retail and corporate customers.

At least three leading banks in the country have initiated tighter ‘know your customer’ (KYC) documentation to mitigate potential credit risks as well as other types of risks related to illegal activities such as money laundering and dealing in illicit fund movements.

While many banks are closely monitoring existing accounts in terms of fund flows and repayment schedules of existing loans, instructions have been issued to relevant departments to strictly follow customer due diligence process.

The quarterly credit sentiment survey of lenders by the UAE Central Bank in the fourth quarter of 2014 had hinted at a potential slow down in credit demand and tightening of credit standards at the aggregate level.

Credit rating agency Standard & Poor’s said this week that the banking sector in the UAE is expected to face deceleration in credit and deposit growth in 2015, accompanied by relatively higher credit losses that should limit earnings growth of banks to mid-single digits.

After going through nearly four years of deleveraging and high provisioning, the UAE banks had witnessed steady growth in lending largely in the retail segment. Amid favourable operating conditions, banks witnessed a credit growth in excess of 10 per cent and overall earnings growth in excess of 22 per cent last year.

Banks are understood to be turning cautious on lending in the context of weakening macroeconomic conditions due to a sharp decline in oil prices. The continued volatility on the equity markets and somewhat of a correction in the residential real estate market after two years of sharp price appreciation are also viewed as a threat to the overall asset quality.

Analysts say a potential slow-down in credit growth could be the result of both slowing credit demand as well as tighter due diligence.