Fitch warns over GCC debt relief schemes

Rating agency says plans discussed by Kuwait, UAE could 'increase moral hazard'
Fitch warns over GCC debt relief schemes
By Andy Sambidge
Tue 16 Apr 2013 12:29 PM

Household debt relief schemes being discussed in some Gulf Cooperation Council (GCC) member countries could increase moral hazard, Fitch Ratings said on Tuesday.

The relief plans need to be coupled with regulation to deter reckless borrowing and lending to stave off negative implications for banks and sovereigns, the rating agency said in a statement.

"We expect the schemes, like the one approved by the Kuwaiti parliament earlier this month, to be limited in scale and duration in order to reduce risks of moral hazard and costs to the sovereign," the statement said.

"A recurrence of a consumer debt boom could occur if borrowers take on excessive amounts of debt in the expectation they will be cleared by the authorities. This would likely be detrimental for banks' asset quality," it added.

Over the past two years, central banks throughout the region have tightened retail lending regulations on personal unsecured loans to enhance lending criteria.

These measures should benefit bank asset quality in the longer term, Fitch said.

However it added that full implementation of stricter underwriting standards is challenging for many GCC banks because they lack a working credit bureau and other reliable data.

Fitch said: "If loans are restructured as a result of a debt relief scheme, the solution needs to be sustainable for the borrower. Otherwise banks will only store up bad loan problems. For instance, the UAE debt settlement fund sets monthly repayments for restructured loans at an affordable level of the borrower's salary."

Debt relief schemes can raise costs for banks, but Fitch said it expects their impact on profitability to be limited and manageable as long as the programmes remain narrow in scope.

If the cost of the debt relief falls more on the sovereign, there could be implications for its creditworthiness, it added.

Governments in the GCC are increasingly focused on improving social conditions and wealth distribution.

The Kuwaiti parliament recently approved debt relief measures for its nationals for personal loans taken from commercial banks before end-March 2008.

This plan covers KD744m ($2.6bn) of consumer loans and needs to be approved by the Emir.

The UAE set up an AED10bn ($2.7bn) debt settlement fund to clear defaulted debts of its citizens in 2011, but to date there has only been limited utilisation.

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