By Joanna Hartley
Move will cut loan to deposit ratios that jumped inline with loose lending policies.
Higher interest rates for short-term deposits are being used by banks in the UAE to encourage deposits in a bid to boost deposit bases, it was reported on Saturday.
The move is aimed at improving loan to deposit ratios that jumped last year at many banks that resulted in the recent liquidity problems, which forced many banks to curb their lending policies.
Short-term fixed deposits are an expensive route for banks to take, but the move is in line with a Central Bank dictate to reduce loan to deposit ratios, said analysts.
HSBC is offering rates for fixed term deposits of one month, three months and six months of 5.05 percent, 5.75 percent and six percent, respectively, according to UAE daily The National.
Meanwhile, Standard Chartered has rates of 3.85 percent, 4.15 per cent and 3.9 percent for the same terms.
“The banks are now trying to attract deposits to adjust their risk; they need to beef up their depository system to be more immune and less risky. Reducing lending is not the only way to reduce risk,” said Yazan Abdeen, a fund manager at ING Investment Management.
The UAE’s Central Bank is expected to monitor loan to deposit ratios more closely from now on, as high ratios are an indicator of high risk in the banking sector, analysts added.
Emirates NBD saw its loan to deposit ration increase from 118 percent in 2007 to 128 percent last year, according to Wadah Al Taha, a market and banking analyst.
It is now offering 1.75 per cent, 2.25 per cent and three per cent on fixed deposits of one month, three months and six months, respectively.
“It was all right when the economy was growing fast and there was a hunger for loans. However, this ratio needs to come down under the changed economic scenario,” Al Taha said.
“I believe the central bank would be looking at this ratio more strictly now. It is a rebalancing act to shore up capital ratios, and a confidence-building measure at the same time that probably could lead to customers opting for longer-term fixed deposits,” added Deepak Tolani, a banking analyst at Al Mal Capital.
Earlier this week the Central Bank governor, Sultan Al Suwaidi, said the credit shortage had eased, with banks no longer requiring the AED50bn ($13.61bn) emergency fund.
“It has not been needed at this point in time because liquidity is better,” Al Suwaidi said.
The UAE banks are simply taking more from borrowers to pay to depositors. This is likely to promote incidences of default in mortgages and also cripples the property market. The money that is now flowing to banks cannot be spent in the retail market and this will in turn lead to failed businesses and unemployment. This in turn will lead to more default and a vicious spiral The banks are attempting to create a carry trade on the Dirham. Carry trade has a nasty habit of coming unwound in a hurry as will be the case here when nervous depositors see more defaults and a collapsing property market. Wake up! 6% on a USD pegged currency can only mean high risk. If banks genuinely wanted to reduce exposure they could achieve this by simply demanding the equivalent repayment from borrowers but the difference being paid to Principle not Interest. In this way they achieve the cash in the hands while steadily reducing the exposure to loans on their books. Its a win-win situation for both parties albeit hard on the borrowers to come up with the extra. But if the banks are charging the extra in interest anywhat, what option do they have? Raising borrowing rates in this environment is pure folly - Most other countries are trying to relieve the mortgage holder to avoid default and encourage spending. Nothing has changed and once again their policies will lead to further distress for all.
Frankly, this scenario is how to destroy the economy- the entire world is reducing interest rates but here they are going through the roof, unless the banks are stopped the economy will further decline and everyone will lose! Retail borrowers and the corporates all are having to pay the high rates and this just will add to the burden- we want the economy to boom so the correct ingredient is lower rates not higher rates.