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Move to Cut Interest Rate on Corporate Deposits in Offing

ABU DHABI - The Central Bank of the UAE and the Ministry of Finance aim to reduce the interest rates that banks pay on corporate deposits so as to improve their loan-to-deposit ratios and spur them to resume lending.

Recent capital injections of Dh120 billion by the federal government and Dh16 billion by Abu Dhabi into its banks have so far not motivated a resumption in lending. Bankers say this is because their loans still outweigh their deposits to an uncomfortable degree.

“We want to break the vicious circle and rigidity that have developed as a result of the liquidity crisis,” said Sultan bin Nasser Al Suwaidi, the Governor Central Bank of the UAE, speaking at an annual lunch organised by the Emirates Bankers’ Forum and sponserd by the Bank of New York Mellon. The capital injections have enhanced liquidity and strengthened the banking 
sector, he said.

“It is stable now, as no bank is overdrawing its current account beyond its reserve requirements,” the governor told the bankers in the capital on Thursday. He added that the interbank interest rates have come down but are still higher than in some other 
GCC countries.

Speaking more broadly about the impact that the global financial crisis would have on the UAE, the governor said the nation’s economic growth rate would decline “from high single digit to low single digit in 2009 and 2010.”

Al Suwaidi said that the banks’ consolidated balance sheet for the month of January 2009, showed a slight increase in loans and advances over the previous month, a positive sign even though the lending grew at a single-digit rate.

The governor said loans and advances on a gross basis remained higher than customer deposits by about Dh116 billion as of January 31, 2009, a gap that is covered by banks’ equity capital and reserves totalling approximately 
Dh180 billion.

The governor said he was satisfied with the good performance of four out of 23 local banks whose audited annual accounts he has seen so far.

“Our banks did not go into structured products or similar innovative investment banking products, therefore their assets and off-balance sheet items are straightforward,” he said, referring to the collapse of US banks that were overly exposed to such risky 
financial instruments.

However, even if banks have assets of good quality, they need to ensure adequate provisions for any loans that might be at risk.

Banks would also need provisions for loans to businesses that could suffer a cash crunch as a result of the ongoing global financial crisis or higher 
funding costs.

Regarding real estate loans, he hinted that some adjustments will take place in the property sector but suggested this would depend on rental rates, which are expected to decrease gradually.

Real estate prices, however, fell slightly for psychological reasons such as the sentiments of buyers and sellers and not only because of the non-availability of bank loans.

“We expect the real estate sector to be affected, but we must understand that this sector is very rigid and behaves somewhat differently from stock markets, due to the fact that a large part of the sector is owned by single and wealthy landlords who can weather high vacancy rates”, the governor remarked.

On a positive note, he said that real estate loans amounted to Dh172.74 bilion at the end of 2008, which is less than the banks’ equity capital and reserves of Dh180 billion.

Real estate loans comprised 17.8 per cent of the nation’s Gross Domestic Product (GDP), which is less than the comparable figures for the US and the UK —101 per cent and 86.3 per cent respectively.

Banks in the UAE are paring their foreign liabilities, such as foreign interbank deposits, and are also repaying syndicated loans, medium term notes and European commercial papers.

The governor assured that the monetary policy would continue to be aimed at maintaining low official interest rates to promote economic growth this year.

· haseebhaider@khaleejtimes.com