Retail banking: Changing the game

Dubai:  Customers may soon find it easier - and cheaper - to move between banks following new retail banking regulations announced by the UAE Central Bank, but limits on personal loans will be ineffective without the full credit history of customers, said industry officials.

With early settlement fees for loans now pegged at a maximum of one per cent - instead of the five per cent charged by many banks - industry experts said it may precipitate a "race to the bottom" with more personal loan buyouts happening as customers go for the best rates and lowest charges.

"For sure, people who are thinking of moving banks will be encouraged to do it," said Zaid Al Kamhawi, Chief Business Officer for Dubai-based Emcredit, the UAE's first credit bureau.

Cap on personal loan

On February 23 the UAE Central Bank published regulation No. 29/2011, setting limits for fees and commissions charged on customers. The new rules also set limits on personal loans to 20 times a borrower's salary and caps loan payments at 50 per cent of his/her monthly income.

Problem loans in the UAE surged 36 per cent in December 2010 from a year earlier to Dh44.3 billion, according to a Bloomberg report, quoting Central Bank data.

A loan agent for a local bank who requested anonymity said the new rules will be a "game-changer" as fees are standardised and banks compete on interest rates and service.

Meanwhile, banks such as Emirates NBD are making an 11th-hour effort to woo customers with a "nil downpayment" on car loans, which will be a thing of the past under the new rules.

The regulations - which, according to sources, will come into effect on March 15 - require car buyers to raise 20 per cent of the price tag.

A car dealer said retail sales may be affected in the short term: Up to 80 per cent of about 230,000 cars sold each year are done through financing.

Felix Welch, Director of Sales and Marketing at Arabian Automobiles, dealers of Nissan, Renault and Infinity, said that on the flipside, lenders will be forced to offer more creative financing options.

"It will be more of a challenge [to buy a car] for a lot of people with a lot less cash available," said Welch, adding: "With charges now more transparent, it will lead to more competition and customers will be the biggest winners."

Chris de Bruin, Head of Consumer Banking at Standard Chartered-UAE, said the new regulations will have a minimal impact on them, as most of the policies and pricing in place already comply with the rules.

"It will enforce responsible lending," said Bruin, adding the new rules will boost demand for financial services as trust between banks and individuals improves.

But caps on lending may be ineffective without credit history, said Al Kamhawi.

"Regulations limiting personal loan amounts, if not supported by full credit reporting, might push borrowers to apply and borrow from multiple banks in order to raise the required funds," said Al Kamhawi. He said credit history in the UAE covers only up to 30 per cent of banks and borrowers.

"If this happens, borrowers will face the difficulty of managing multiple lending relationships. This regulation makes it clear that there is a rising need for credit reporting if lenders hope to comply with these regulations."

• PERSONAL LOANS:   MAXIMUM RATE

Processing fees : 1% of loan amount, Min. Dh500; Max Dh2,500

Credit life insurance: At banks' discretion

Delayed payment penal interest charges : 2% of delayed amount. Min Dh50; Max Dh200

Loan top-up : 1% of the top-up amount; Min. Dh500; Max, 2,500

Deferment of installment : Dh100 per deferment

Early settlement from same bank loans : 1% of remaining balance

Early settlement from other bank loans : 1% of remaining balance

Final settlement from other sources/end of service benefits (EOSB) : 1% of remaining balance

Partial payment from all sources, including EOSB : 1% of the partial payment amount

Loan rescheduling fee : Dh250

Revolving overdrafts fees: Dh200

Loan cancellation fee : Dh100

Relationship fee : Without fees

• CAR LOANS: MAXIMUM RATE

Processing fees : 1% of loan amount; min Dh500; Max 2,500

Early settlement for car loan : 1% of remaining balance

NOC to traffic department : Without fees

Replacement of existing post-dated cheques with new post-dated cheques : Without fees

Advance payment of installment : 1% of the advanced payment

Change of due date on standing instructions : Dh25

Installment deferment charges : Dh100 per deferment

Loan rescheduling fee : Dh250

Late payment penal interest charges : 2% over agreed rate, Min.Dh50 Max. Dh200

All other items not mentioned above : Without fees

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