By Joanna Hartley
Gov't agency needed to buy up distressed loans, easing liquidity - conference.
The UAE government has been urged by property companies to set up an agency to buy up defaulting loans from banks in a bid to boost lending, it was reported on Wednesday.
Delegates attending an economic conference in Abu Dhabi said the country's economic recovery was faltering because banks were plagued by non-performing loans (NPLs) that were stopping them from lending, according to UAE daily The National.
Setting up an agency, dubbed a “bad bank”, to buy up these distressed loans would alleviate the stranglehold on credit that was contributing to the slowdown in the real estate sector, they said.
“We need to remove NPLs from the banks, so they can do their work,” said Gurjit Singh, the chief property development officer at Sorouh at the third annual Abu Dhabi Economic Forum.
Hani Shamma, the chief executive of Bloom, an Abu Dhabi property developer, agreed improved liquidity needed to be addressed to aid recovery.
A special-purpose government vehicle that would buy up existing bank loans and bundle them into securities would help, he added.
“There are pockets of liquidity, but they’re not necessarily going through the banking system. You need a government agency that does this form of securitization,” he said.
The idea had merit, according to analysts.
“It seems like a logical thing to do. Liquidity needs to be redirected to the market,” said Fahd Iqbal, vice president of equity research at EFG-Hermes in Dubai.
The sentiment came on the same day as Standard Chartered bank urged the UAE government to take more measures to improve liquidity in the banking sector.
“More money should be poured into banks,” agreed Abdullah el Kuwaiz, the former assistant secretary general for economic affairs at the Co-operation Council for the Arab States of the Gulf in Riyadh, and delegate at the conference.
Last week the Dubai government launched a $20bn bond to boost the ailing economy, of which $10bn was bought up by the UAE Central Bank.
The UAE government has taken steps to relieve the funding shortage by pumping AED120bn ($32.67bn) of liquidity into the banking system through loans and deposits.
Abu Dhabi has also injected AED16bn of new equity into five of its local banks to shore up their capital base.
However, Dubai’s banks have not had the same.
Much as I would like to see this happening for personal reasons also (as I work in financial sector), but I can't help being candid. The NPLs are partly due to the severe economic crisis in the US and Europe, with its snowball effects around the world, but partly due to the rash and aggressive lending policies of banks. In a bid to bloat their balance sheets and look good, banks extended credit to counterparties that did not have the capacity to repay, this was pure greed. To say the least, it wasn't banking, at least ! So what should be done? Since the problem is two-dimensional (broadly speaking), the solution should also be as such (not going into details). First, the banks that have been lending with impunity, with terribly lax credit policies, should be held responsible. How? Well they should either be merged with or acquired by 'better' banks (with relatively well-thoughtout credit policies), who acted more responsibly with people's money. Thus as a first step we should see industry consolidation from within. Then, with the government having satisfied that the money they provide would not be irresponsibly 'given-out' for speculative purposes (given prudent lending policies), there can be liquidity injection to improve the situation from outside(of the banking sector). I'm not an economist, but i strongly feel that responsibility of the callousness and subsequent mess should be placed on the right shoulders. So injection when we see we really deserve it. Otherwise, we'll squander it again.
Yes, I agree wity Bilal that there was an element of greed by banks in providing mortgage loans to look their balance sheets good. Also, due to ongoing market conditions during boom time, perhaps there was also a lot of pressure on the sales people to attract customers to provide mortgage loan as if they were selling credit cards. And all this also led to a more speculative and attractive market for the customers.But at the end of the day, it is the customer who has to pay back. And with the global slowdown of economy and recession looming in, the customers are not able to pay which perhaps is resulting in NPL's and bad debts. Unless this problem is looked at rationally and goverment steps in to buy up bad loans this is going to be worse than current situation. Hence this idea is welcome.Govt. should come up with some agency who should deal on such matters to protect the real esate market. And also a mechanism for dispute redressal in form of a committee should be set up by the govt. who should deal between banks and customers to deal with bad debts and come out with some solutions to tackle this problem of NPL's.
I have read enough analysis on the credit crunch, to figure that one of the main reasons is exactly the topic of this article: 'A special-purpose government vehicle that would buy up existing bank loans and bundle them into securities would help'?? who will bear the cost of those bad debts? those who will buy those securities, bearing a high default risk, that would eventually materialised and crash the economy even further. Banks were responsible to evaluate the creditworthiness of the mortgage bearers and given money away, let them now deal with the defaulters and execute the mortgages, if required. A painful process but one that would not repeat the already tragic history of the western economies. it is sad to see so-called 'analysts even suggesting this!
I donot understand why UAE govt. is mum about the visa issue. Do they want to keep quite till some goals are achieved? What is the problem in announcing visa status for the property holder. Banks are still calling me for loans, i.e. personal loans upto 250 thousnd. That means they are ready for finance for the job holder. i thing a word from Horse's mouth will certainly help boost many things!!!!!!!!!