Personal loans likely to be cheaper-Oman  

MUSCAT — Omani banking sector is likely to offer some relief to the public with a surprise two-percentage-point cut in interest rates on personal loans as borrowers and the general public believe that the banking regulator might consider a significant reduction in interest rate ceiling on consumer loans.

In fact, the RO1.2 billion personal loan segment is the bread and butter of commercial banks in Oman and banks get hefty-spreads on personal loans.

Personal loans had the highest share in banks' credit portfolio last year at over RO1.2 billion, constituting nearly 36 per cent of the total credit. At present, the total bank credit is well above RO3.3 billion.

However, the liquidity position of local banks seems to be weaker as compared to other AGCC banks.

The average loan (both consumer and corporate) to deposit ratio of local banks is the highest in the region at over 100 per cent compared with the AGCC average of 76 per cent.

Though the Central Bank of Oman (CBO) has not announced anything officially, it is learnt that the higher authorities are seriously examining the issue of abnormal interest rates on personal loans and concerned about high interest rates that an average Omani is paying today.

Residents believe that the interest rate ceiling on personal loans may fall by at least one or two percentage point from the present 11 per cent to 10 or 9 per cent. As a result, healthy competition will emerge among banks and all banks will be forced to lower interest rates to at least below nine per cent or so.

Interestingly, the interest rates on consumer loans in Oman are believed to be the highest in the region.

Though borrowers and the general public expect a significant cut in rates before the end of this year, the apex bank's move is unpredictable.

Technically, interest rate in Oman is determined by the dollar interest rates as the rial is pegged to the US dollar. In fact, all the Gulf currencies are pegged to the dollar.

The increase in personal loans has been attributed to the easing of quantitative ceiling on personal loans from 35 per cent to 40 per cent of a bank's total credit with effect from January 2002.

"Banks are reaping higher profits on personal loans and in fact a personal loan borrower is indirectly subsidising a corporate borrower.

The only ray of hope for the average borrower is a bold step by the CBO, i.e. to further reduce the interest rate ceiling on personal loans. Indeed, banks are facing the problem of lending limitations on various grounds, but it is unfair if they continue to charge higher rate of interest on personal loans, and put the common man under continuous pressure," a group of borrowers and general public told Times Business.

Currently, one or two banks charge below 10 per cent interest to select customers. Four months ago, the apex bank reduced the interest rate ceiling on personal loans to 11 per cent from 12 per cent.

However, the scope for savings still remain poor and public indebtedness has been mounting to an abnormal level as the interest rates are very high as compared to the rates prevailing in neighbouring countries.

In fact, there has not been any significant growth in public spending because of the recent one percentage point reduction in interest rate ceiling on personal loans. A genuine increase in spending can only be seen, when banks lend competently, at lower rates.

If personal loans are made available at reasonable interest rates, spending will increase and when spending goes up, both the supply of goods and volume of business will flourish.

As trading activities increase, the economy will not only witness expansion of small and medium businesses, but also offer more job-opportunities for nationals.

The small businesses have been under severe pressure since 1999, as their business volumes have come down drasti- cally by over 50 per cent in the last three years.

Furthermore, there has been significant reduction in banks' cost of borrowings since 1999. The core issue is why should the average Omani pay 11 per cent or nine per cent interest on personal loan? Banks have been registering good growth in mobilising low-cost deposits since early 1990s.

However, they are reluctant to lend even a small portion of such low-cost funds to small borrowers at reasonable interest rates at a time when dollar interest rate stands below one per cent. In fact, when the production cost is significantly lower, the consumer should get the finished product (personal loan) at a reasonable price (interest rate).

It appears that the loan burden of an average borrower comes to more than 70 per cent of his monthly income. As the borrower borrows a large sum, a major portion of his monthly income will go to the bank loan installment.

Market forces are not determining the ceiling on personal loans and banks had not been told to charge a fixed 11 per cent interest on personal loans.

The 11 per cent interest rate is the ceiling on personal loans imposed by the banking regulator, and banks are free to charge below the limit, and of course, not more than the ceiling.

The issue of higher interest rates is a worrying market paradox in today's fast changing domestic fiscal environment, which is endeavouring to integrate with the world market.

When the nation spends a major-chunk of its revenues for social development, banks should not be allowed to take undue advantage out of the common man's necessity.

Any significant cut in interest rates on personal loans will not affect banks' profitability as they can increase the volume of personal loans, as the quantitative ceiling has already been eased by five per cent to 40 per cent of the total credit.

In conclusion, the apex bank's monetary policy and other timely measures will continue to lay foundations for the domestic banking sector growth. It is also welcome that banks are highly cautious and undertake only quality lending as the total bad loans of the sector still remains at hefty levels.