Having disbursed loans liberally before the global recession began in late 2008, Qatar’s crowded banking sector is now paying a huge price for its reckless ways in the form of rising default rates.
Bad and doubtful loans have been piling up, forcing the banks to do increasing provisioning — which eventually erodes their profitability — and keep their resources focused on recovery — an unproductive and thankless job.
The situation is so challenging that last year alone un-serviced loans of three large banks together totalled more than QR2.25bn.
And provisioning by the banking sector as a whole as a cover-up against possible bad loans in the year (2009) literally went sky-high, breaking all previous records to reach an incredible QR13.75bn.
The exposure to doubtful debt of one of the above banks is said to be QR800m, while that of another is put at QR782m. The third one is said to have un-serviced loans to the tune of QR674m.
In all these cases, the ratio of bad loans to the total credit portfolios of these banks works out to more than two percent.
Banking industry sources point out that never in the past has the default rate of a bank breached the one percentage point level.
The provisions made by the banking industry last year were up almost QR800m over 2008.
The provisioning figure for 2009 (QR13.75bn) works out to 4.65 percent of the sector’s total customer deposits — a ratio considered high by international banking standards.
Some individual expatriate borrowers have run away, leaving huge loan amounts only partially repaid. Then there are others — both individuals and companies — who are unable to service their loans due to financial woes resulting from the global financial crisis.
There are clear-cut directives from the banking regulator (Qatar Central Bank) that a loan be considered doubtful if three monthly instalments remain unpaid.
A bank in such a case is required to kick off recovery procedures. Some banks have set up task forces whose job is to hold meetings with borrowers who are unable to service their loans, and find the reasons and, if possible, reschedule their loans.
These borrowers are mainly companies that borrowed huge sums to launch projects that are now stalled midway. Rescheduling of loans is basically done to ensure that such projects are completed.
In some cases where it is not possible to either recover a loan or reschedule it, liquidating the collateral is eventually the ultimate solution for a bank, banking industry sources point out.