Dubai: National Bank of Ras Al Khaimah (RAKBank) has been at the forefront of providing finance to small and medium-sized enterprises (SMEs) in the UAE. The bank is part of several initiatives by Emirates Development Bank, Dubai SME, Khalifa Fund and RAK SME to support SMEs and is eager to be part of the post-COVID recovery of this sector of the economy.
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Speaking to Gulf News, Dhiraj Kunwar, Managing Director of Business Banking at RAKBank, said there are clear signs of improving business confidence in the UAE and that the bank expects a gradual increase in credit demand, supported by strong economic fundamentals.
How is corporate credit demand picking up after the slump that followed the COVID crisis?
To start with, I believe we are seeing a slight increase in credit demand. This was confirmed by the recently released Central Bank report, in which the assets of banks in the UAE showed an upward trend in the first quarter of the current year. We understand that growth could come from government-related entities (GRE)/institutional lending or from the mortgage portfolio, but now we are seeing modest gains across all business segments, indicating early signs of a rebound, although still nowhere close of pre-COVID levels for consumer/SME lending.
We are seeing early signs of a broad-based recovery in credit demand. The UAE has relatively outperformed many countries in managing and managing the COVID crisis.
– Dhiraj Kunwar, Managing Director of Business Banking at RAKBank
Due to the COVID-related malaise, many corporate loans, especially SME loans, have been postponed or restructured, will that trend continue?
In the heat of the COVID crisis, we have certainly seen a significant number of requests for assistance from both our Business and Personal Banking customers. The Central Bank was very proactive in announcing emergency measures, the so-called Targeted Economic Support Scheme (TESS). This was an important step to take, underlining the resilience of the UAE’s financial system. However, since the end of last year we have seen a gradual decrease in forgiveness requests and from 2021 there are very few requests for debt relief. In fact, our customers have started repaying their loans in the normal way, but some companies still need further support as the COVID impact on certain segments is still apparent.
CBUAE’s most recent credit sentiment survey points to a modest increase in corporate credit demand, but largely for refinancing requirements. Are economic conditions ripe for further credit growth?
Yes, refinanced loans are common industry practice in any economy, but we are seeing early signs of a general recovery in credit demand. The UAE has relatively outperformed many countries in managing and managing the COVID crisis. In my view, however, there are three main factors that will determine credit growth in the foreseeable future, and this includes: how the pandemic will turn out, will the current level of oil prices continue, and finally how will EXPO 2020 affect real property and tourism sectors in the country.
SMEs have been a segment that has been at the center of asset quality issues for banks since 2014, which has led banks to partially cut or significantly scale down that portfolio. Is RAKBank planning to expand that portfolio? What is the reason?
Lending to SMEs has been challenging in many parts of the world, including the UAE. That said, RAKBank has always consistently supported this segment, even at the height of the SME crisis, we have never stopped lending to SMEs. After the SME crisis of 2014-15, lending to SMEs itself changed and the focus was on diversification. Customers currently have access to different types of loan products instead of just the usual small business loan solutions. The bank took an approach that significantly diversified its portfolio, focusing on traditional and cheaper and less risky financing, such as trade finance or commercial real estate financing, and the results were clearly reflected in our books. Banks in the country have put in place smart processes to manage credit risk and the introduction of a credit bureau and tax returns has ultimately helped the industry. In terms of growth, we expect a modest increase in our exposure to SMEs this year.
Recently, the bank signed an MoU with Emirates Development Bank to obtain credit guarantees for SME exposures. Does this significantly reduce the risks on your SME portfolio?
We have been partners with Emirates Development Bank (EDB) for a long time and what we recently signed was basically for a new credit guarantee scheme. This collaboration offers the bank a good medium to get new prospects on board. As part of the agreement, the bank can access a credit guarantee of up to 50 percent and that significantly reduces the risk on that particular transaction and certainly increases our appetite. However, it does not change the risk on the majority of our portfolio, which is not covered by any guarantee scheme. The UAE government has taken many initiatives to create a favorable environment for SMEs to thrive by accessing the loans required for their development, thanks to institutions such as EDB, Dubai SME, Khalifa Fund and RAK SME emphasizing lay on supporting SMEs and trying to create a sustainable ecosystem.
There are rumors in the business community that banks have sharply tightened credit standards. Does that also apply to RAKBank?
In fact, the alignment of credit policies in banks is an ongoing exercise and we, at RAKBank, will continue to evaluate the performance of different sectors and industries. This sometimes leads to the Bank adjusting and adjusting some credit parameters. As I mentioned before, our risk appetite for the SMB segment has not changed significantly, but we are closely monitoring the performance of our portfolio to manage our credit and compliance risk and I believe this is required for any sustainable business.
Most sectors are still reeling from the slump in the economy accentuated by COVID and the prolonged drop in oil prices, how this has changed the lives of SMEs, there are indications that growth is back on track to justify renewed lending?
COVID has changed consumer behavior where online has become the preferred choice, and for small businesses to endure this current climate, they need to adapt. Small businesses should try to get their business online and create an operating system that is more cost efficient. Digital processes are an essential requirement for any business, today’s consumers must be able to order, pay and work completely online. In fact, we’ve seen a surge in demand for our merchant acquisition solutions, as well as a spike in e-commerce companies from the list of our SMB customers. Recently, SME customers have come to us for new credit facilities or for a new solution for project financing.
What kind of credit growth do you expect in your business books this year? Which sectors do you want to focus on when offering financing? And how is the business mix changing?
We do not expect strong growth in our books this year. It is important to emphasize that we have seen many industries, such as healthcare, F&B and education, adapt their business models in an effort to recover from the blow of the pandemic. The shift in consumer behavior is reflected in the business model of SMEs. Lots of sector rotation where consumption and wellness related companies are doing well. We also see that digital ready companies are doing much better than the physical SMEs. We always value sustainable companies, where they are committed and have the know-how to deal with the different risks and challenges surrounding their business. Credit risk is not the only risk worth highlighting when it comes to small businesses, we continuously advise our SME clients to consider elements such as compliance, fraud, cyber and governance turn will make a company more sustainable.
What is RAKBank doing in the field of digitization and how do you manage risks on digital platforms?
RAKBank invests in the digitization of various processes, be it transaction processing, customer onboarding or payments. We have a separate digital app for business customers because SME requirements for services, payments and trade finance are different from those of a private customer. Likewise, our Quick Apply solution enables digital onboarding of Business Banking customers. All our digital services comply with the local laws and guidelines of the Central Bank. We verify documents and obtain signatures according to current banking practice. Today’s SME customers are looking beyond the banking product/services and we are trying to build a digital ecosystem that provides access to a state-of-the-art banking experience, quality content, unique deals, partnerships that SMEs can leverage and connect to a wider ecosystem.