Dubai: The National Bank of Ras Al Khaimah (RAKBank) has been at the forefront of extending financing to small and medium enterprises (SMEs) in the United Arab Emirates. The bank is part of various initiatives of Emirates Development Bank, Dubai SME, Khalifa Fund and RAK SME to support SMEs and wishes to participate in the post-COVID recovery of this sector of the economy.
Speaking to Gulf News, Dhiraj Kunwar, managing director of business banking at RAKBank, said there were clear signs of improving business confidence in the UAE and the bank expects a gradual recovery in demand for credit supported by solid economic fundamentals.
How is business credit demand picking up after the crisis following the COVID crisis?
To begin with, in my opinion we are seeing a slight increase in the demand for credit. This was echoed by the Central Bank report which was released recently, according to which the assets of UAE banks showed an upward trend in the first quarter of the current year. We understand that growth may come from government related entities (GREs) / on the institutional lending side or the mortgage portfolio, but we are now seeing a slight increase across all business segments, suggesting early signs of a good recovery. that it is still not close to pre-COVID levels for consumer / SME lending.
We are seeing the first signs of a widespread recovery in credit demand. The UAE has done relatively better than many countries in managing and containing the COVID crisis.
– Dhiraj Kunwar, Managing Director of Corporate Banking Services at RAKBank
The COVID crisis has seen many business loans, especially SME loans, being deferred or restructured, is this trend continuing?
In the heat of the COVID crisis, we have certainly seen a significant number of requests for relief from our corporate customers and our personal banking services. The Central Bank has been very proactive in announcing relief measures known as the Targeted Economic Support Program (TESS). This was an important milestone to take, which underscores the resilience of the UAE’s financial system. However, we have seen a gradual reduction in requests for relief since the end of last year and from 2021 there have been very few requests for debt relief. In fact, our clients have started to repay their loans normally, but some businesses still need additional support as the impact of COVID on certain segments is still evident.
The latest CBUAE credit sentiment survey indicates a slight upturn in demand for business credit, but mainly for refinancing needs. Are the economic conditions ripe for further loan growth?
Yes, refinanced loans are standard industry practice in any economy, but we are seeing the first signs of a widespread recovery in demand for credit. The UAE has done relatively better than many countries in managing and containing the COVID crisis. However, in my opinion, there are three main factors that will shape credit growth in the times to come and this includes – How the pandemic will play out, will the current level of oil prices hold up, and finally how. Will EXPO 2020 have an impact on reality? real estate and tourism sectors in the country.
SMEs were one of the segments that has been at the center of asset quality issues for banks since 2014, leading banks to partially withdraw or significantly deleverage from this portfolio. Is RAKBank considering expanding this portfolio? What is the rationale?
Lending to SMEs has been a challenge in many parts of the world, including the United Arab Emirates. Having said that, 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 has transformed and the focus has been on diversification. Customers currently have access to different types of loan products rather than the usual lending solutions extended to small businesses. The bank took an approach that significantly diversified its portfolio and focused on traditional and cheaper and less risky finance such as trade finance or commercial real estate finance and the results were clearly reflected in our books. Banks across the country have adopted smart processes to manage credit risk, and the introduction of a credit bureau and value-added tax declaration ultimately helped the industry. On the growth side, we expect a modest increase in our exposure to SMEs this year.
Recently, the bank signed a memorandum of understanding 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 essentially a new credit guarantee program. This partnership will provide the bank with good support for on-boarding new prospects. As part of the deal, the bank can have access to a credit guarantee of up to 50%, which greatly reduces the risk of this particular transaction and certainly increases our appetite. However, this does not change the risk on most of our portfolio, which is not under any guarantee regime. The government of the United Arab Emirates has taken many initiatives to create an environment conducive to the prosperity of SMEs by accessing the loans necessary for their development, through institutions like EDB, Dubai SME, Khalifa Fund and RAK SME which focus on on supporting SMEs and attempting to create a sustainable ecosystem.
There is talk in the business community that banks have significantly tightened credit standards. Is this also true for RAKBank?
In fact, the alignment of credit policy in banks is an ongoing exercise and we at RAKBank will continue to assess various sectors and industry performance. Sometimes this leads the Bank to adapt and fine-tune certain credit parameters. As I said earlier, our risk appetite in the SME segment has not changed significantly, but we are closely monitoring the performance of our portfolio to manage our credit and compliance risk and I think that is necessary for any sustainable business.
Most sectors are still reeling from the economic slump exacerbated by COVID and the prolonged fall in oil prices, how has this changed the lives of SMEs, are there any indications that is growth back to justify loan renewals?
COVID has changed consumer behavior where online has become the preferred choice, and for small businesses to cope with this current climate, they need to adapt. Small businesses should try to get their business online and create a more profitable operating system. Digital processes are a critical requirement for any business, today’s consumers should be able to order, pay and operate entirely online. In fact, we have seen an increase in demand for our merchant acquisition solutions. In addition, we are seeing an increase in the number of e-commerce businesses from the list of our SME clients. Recently, SME clients contacted us for new credit facilities or to request a new project finance solution.
What kind of credit growth do you expect in your business books this year? What sectors do you want to focus on while still providing financing? And how is the business mix evolving?
We don’t expect strong growth in our books this year. It is important to point out that we have seen many industries such as healthcare, foodservice and education fine-tuning their business model in an attempt to recover from the pandemic. The change in consumer behavior is reflected in the operating model of SMEs. Lots of sector rotation where companies related to consumption and well-being are doing well. We are also seeing digitally ready companies doing much better than brick & mortar SMEs. We always value sustainable businesses, where they are engaged and have the know-how to deal with the various risks and challenges surrounding their business. Credit risk is not the only risk to highlight when it comes to small businesses, we constantly advise our SMB clients to consider things like compliance, fraud, cybersecurity and security risks. governance, as this will make a business more sustainable.
What is RAKBank doing in the field of digitization and how do you manage risks on digital platforms?
RAKBank invests in the digitalization of various processes, whether it is transaction processing, customer onboarding or payments. We have a separate digital application for business customers because the requirements of SMEs for services, payments and business finance are different from those of a retail customer. Likewise, our Quick Apply solution enables the digital integration of Business Banking customers. All of our digital services comply with local laws and Central Bank guidelines. We verify documents and obtain signatures in accordance with current banking practice. Today’s SME clients are looking beyond banking products / services and we are trying to create a digital ecosystem, which offers access to a cutting-edge banking experience, quality content, unique offers, partnerships that SMEs can operate and connect to a larger ecosystem.