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Warning on consumerdebt boom in Gulf.

Household debt relief schemes being discussed in some Gulf countries could increase moral hazard, Fitch Ratings has warned.

They need to be coupled with regulation to deter reckless borrowing and lending to stave off negative implications for banks and sovereigns, says a Fitch statement.

"We expect the schemes, like the one approved by the Kuwaiti parliament recently, to be limited in scale and duration in order to reduce risks of moral hazard and costs to the sovereign," Fitch Ratings says.

"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," Fitch said.

"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. However, full implementation of stricter underwriting standards is challenging for many GCC banks because they lack a working credit bureau and other reliable data," said Fitch.

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 we expect their impact on profitability to be limited and manageable as long as the programs remain narrow in scope, according to the statement.

If the cost of the debt relief falls more on the sovereign, there could be implications for its creditworthiness. Those implemented so far are small compared to sovereign resources in the countries involved.

Nonetheless, the risk of moral hazard triggering excessive borrowing and lending could have bigger sovereign implications. This emphasizes the need for debt relief measures to be coupled with regulations to deter a rapid build-up of consumer debt. 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 KD 744 million ($ 2.6 billion) of consumer loans and needs to be approved by the Emir. The UAE set up an AED 10 billion ($ 2.7 billion) debt settlement fund to clear defaulted debts of its citizens in 2011, but to date there has only been limited utilization.

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Publication:Arab News (Jeddah, Saudi Arabia)
Date:Apr 18, 2013
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