KT edit: Stronger banks build resilient economies

The latest action to relax two prudential ratios will strengthen the local banks at a time when loan defaults are on the rise

At a time when the pandemic has halted the world economy in its track, the support that central banks and governments are offering to banks is vital. The banking industry is one of the most efficient channels to ensure liquidity in the system, and people and businesses have access to credit when in need. The Central Bank of UAE's Targeted Economic Support Scheme, or Tess, which was launched in March this year, has done well by allowing people and businesses to build a cushion. Temporary relief in loan repayment through deferrals allowed households and businesses to create a buffer, which should be helping families and individuals now as companies across industries are experimenting with pay cuts, furloughs, to manage cash flows. The central bank's call was well timed, and its constant intervention has proven that the true financial cost of Covid-19 cannot be assessed at one go. It needs constant reevaluation and measures need to be tailored as per the need of the different sectors. The latest action to relax two prudential ratios, the Net Stable Funding Ratio and the Advances to Stable Resources Ratio, will strengthen the local banks at a time when loan defaults are on the rise. With such measures, the central bank is ensuring enough liquidity in the system so that people and businesses in need get credit support and become resilient to the changing economic climate. The goal is to ensure there is consumption and generation of wealth.
The coronavirus crisis, with its associated business closures, travel and event cancellations, work from home advisories, has triggered a deep economic downturn of uncertain duration. Governments around the world have been injecting billions into the economies to avert a severe financial crisis. The European Central Bank in March announced a massive support programme that will expand its asset purchases by $880 billion over nine months. With near zero interest rates, the US Federal Reserve is extending up to $2.3 trillion in lending to support households, employers, financial markets and local governments. These superlative figures cannot be compared with the local economies in the region that are far smaller in size. But what is notable here is the $70 billion worth of economic stimulus by the UAE is helping businesses during this crisis. The ministry of economy too is geared to implement a flexible plan, which will be implemented in three phases and include 33 initiatives focusing on different sectors, including supporting labour market and stimulating trade. The UAE economy is likely to contract by 3.6 per cent this year, which means many sectors will need more assistance and handholding. The banks in the UAE are resilient and help from the central bank will allow them to support the needs of the economy during the crisis. There is pessimism and anxiety among people on what to expect in the near future. Measures such as these will ease pain and build more resilience into the system.