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‘GCC banks must minimize NPLs as loan defaults loom’

27 Mar 2021

The ongoing pandemic has resulted in Middle Eastern economies confronting severe repercussions, with banking institutions widely expected to experience companies defaulting on loans and cashflow problems.

In times of economic crisis, commercial banks with issues surrounding non-performing loans (NPLs) must, however difficult, minimise such impacts and secure NPL portfolio value, according to a new report by Arthur D. Little (ADL).

The report, titled ‘Non-Performing Loan Management: The case of setting up a Workout Unit,’ provides exclusive insights into how banks can mitigate NPL issues and offers a detailed overview of how to establish a dedicated workout unit. 

“The COVID-19 pandemic has devastated economic activity across the globe and GCC countries have not been shielded from these effects,” said Philippe DeBacker, managing partner, global practice leader financial services, at Arthur D. Little.

“Major disruptions to the hospitality, retail, F&B, and travel and tourism sectors will severely impact both companies’ financials and overall employment levels in the GCC countries. This will, in turn, hinder the ability of GCC banks’ corporate and retail customers to repay loans and honor other commitments,” he said in a press release.

As per the report’s findings, the current crisis will impact banks with a significant degree of strain. 

While banking sector problems in the 2007 financial crisis resulted in liquidity problems in the overall economy, the current dilemma has already been unequivocally defined as a ‘real’ economic crisis. 

The severe GDP declines following pandemic-inducted lockdowns will have a devastating effect on companies and retail customers’ creditworthiness, something that directly affects players in countries across the Middle East.

“Looking ahead, it’s inevitable that NPL figures will rise quite substantially in the next year or two,” explained NimaObbohat, partner, global head of banking at Arthur D. Little. 

“Given the implications of rising NPLs on profitability and capital position of banks it’s crucial to be well prepared and make the necessary adjustments ahead of time,” she said.

Obbohat said it is crucial that banks confront today’s reality directly and make a well-informed decision on the strategy they wish to pursue. 

“Because every bank will experience financial and operational situations stemming from higher NPL volumes, the issue is very time-sensitive. Middle Eastern banks are required to choose a strategy, build their capabilities, and ensure resources are in place ahead of schedule. Those that do so while adhering to these best practices will be better positioned to emerge from this crisis, with quicker recovery periods and better access to capital if and when required,” she added.

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