Banks tell companies to provide more collateral

Banks start to ask for additional collateral from corporate borrowers with property assets that have dropped in value, or who are struggling to repay their loans.

AD200910709129886AR

Banks have started to ask for additional collateral from corporate borrowers with property assets that have dropped in value, or who are struggling to repay their loans. Lenders including Emirates NBD, the UAE's largest bank by assets, have taken the measures to protect themselves against further increases in bad loans. Provisions for bad loans have escalated this year, according to the UAE Central Bank.

Asked whether corporate customers have been told to put down more collateral, Sanjay Uppal, the chief financial officer at Emirates NBD, said: "Yes, selectively that might have been the case. We obviously constantly review our collaterals and at times will ask for additional collateral." Despite the falling value of property investments in many locations across the Emirates, the bank is not excessively exposed to the sector, Mr Uppal said. "We are at a fairly comfortable level with the valuations of our collateral."

Standard clauses in most loan agreements state that a bank can ask for more collateral in case the existing pledge falls below a certain percentage of the loan. Lawyers expect to see such clauses enforced by lenders as sinking asset valuations increase banks' risk. "I know that this is happening, there is no doubt about it," said Walid Jaafar, a partner at the Dubai law firm Fichte and Co. "I am sure a lot of meetings are being held. Banks don't sit and wait for the developers."

Collateral serves as a guarantee for banks in case the lender defaults. Non-performing loans have been rising as companies feel the effects of the financial crisis and default on their debts. Additional collateral could include personal guarantees from a firm's shareholders or partners, more equity or bank guarantees from other lenders. Mr Jaafar said that typically, property assets were of the greatest value as collateral but "we have seen that this may not be the best in our area", Dubai.

The UAE has invested billions of dollars in the construction of thousands of new apartments and villas as the country seeks to diversify its economy and build its tourism infrastructure. But a sharp decline in property prices this year has left lenders heavily exposed to distressed developers. Property prices in Dubai have fallen as much as half from last year's peak, while falls have been far less pronounced in Abu Dhabi, according to brokers.

"I would expect every prudent bank to review their large exposures on a frequent basis," Niall O'Toole, a partner at the law firm Clyde & Co in Abu Dhabi, said. "It would be foolish to do otherwise. If the value of the underlying security has fallen then bank clients should expect banks to request either additional collateral or a reduction in the level of debt. This could cause difficulties if, for example, a company or a bank was overly reliant on the value of land."

Banks have seen the value of property put up as collateral by developers or large corporate borrowers fall by as much as 50 per cent, depending on when the loan was taken out. But in the case of older loans, some property-based collateral has also increased in value. "We have all seen how the value of land has fallen in the UAE and we are now witnessing how this is working its way through the financial system," Mr O'Toole said.

Banks can take up to 125 per cent of the loan's value as collateral to account for charges and interest. @Email:[e-mail]