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Banks tighten due diligence to check bad debts.

Dubai: A number of banks in the UAE are preparing for lower credit growth and are implementing stricter due diligence on both retail and corporate customers, according to information available to Gulf News.

At least three leading banks in the country have initiated tighter aACAyknow your customer' (KYC) documentation to mitigate potential credit risks as well as other types of risks related to illegal activities such as money laundering and dealing in illicit fund movements.

"The new move is to exercise extra caution in opening new accounts and providing new facilities. Although the move is not against any specific threat, tighter KYC requirements are aimed at checking the overall quality of credit," said the retail banking head of a local bank.

While many banks are closely monitoring existing accounts in terms of fund flows and repayment schedules of existing loans, instructions have been issued to relevant departments to strictly follow customer due diligence process.

The quarterly credit sentiment survey of lenders by the UAE Central Bank in the fourth quarter of 2014 had hinted at a potential slow down in credit demand and tightening of credit standards at the aggregate level.

Credit rating agency Standard & Poor's said this week that the banking sector in the UAE is expected to face deceleration in credit and deposit growth in 2015, accompanied by relatively higher credit losses that should limit earnings growth of banks to mid-single digits.

After going through nearly four years of deleveraging and high provisioning, the UAE banks had witnessed steady growth in lending largely in the retail segment. Amid favourable operating conditions, banks witnessed a credit growth in excess of 10 per cent and overall earnings growth in excess of 22 per cent last year.

Banks are understood to be turning cautious on lending in the context of weakening macroeconomic conditions due to a sharp decline in oil prices. The continued volatility on the equity markets and somewhat of a correction in the residential real estate market after two years of sharp price appreciation are also viewed as a threat to the overall asset quality.

"Banks in the UAE are likely to adopt a more conservative stance toward loans to the private sector and particularly to retail, leading to a relative decline in lending growth. However, we expect lending to government-related projects to remain robust," said Standard & Poor's credit analyst Timucin Engin.

Analysts say a potential slow-down in credit growth could be the result of both slowing credit demand as well as tighter due diligence. According to the central bank survey, demand growth for business credit, while still growing, slowed noticeably in the December quarter.

Such results, the report said were primarily attributable to the reported softening of credit appetite from government-related entities (GREs) and small-to-medium enterprises (SMEs).

Credit demand-growth was reported to have weakened across key sectors such as construction, property development and retail and wholesale trade. Credit standards, on the other hand, were relatively unchanged.

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Publication:Gulf News (United Arab Emirates)
Geographic Code:7UNIT
Date:Feb 18, 2015
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