33pc exposure in real estate puts banks in Oman at risk

Higher vacancy rate in the real estate sector could pose a potential risk to banks in Oman as per the latest report on financial stability.
The report says banks have substantial direct and indirect exposure to the real estate sector.
However, the banks’ exposure in the sector is in line with their counterparts in other GCC countries both in terms of real estate credit to GDP and real estate credit to total credit.
Direct exposure includes financing residential or commercial real estate, whereas indirect exposure includes other financing secured against real estate. The total real estate exposure of the banking sector is 33 per cent of the total lending portfolio, which is considered large. Therefore, any weakening in the real estate market may expose the banking sector to considerable risks.
Although at present there are no major signs of stress in the Omani real estate market, sizable exposures signify that a shift in investors’ sentiments, decline in rents or higher vacancy rates for built-to-rent real estate may rapidly jeopardise the stability of the banking sector.

The report says in Oman lending to individuals surpasses all other sectors.
This kind of household indebtedness is characteristic of a resource dependent economy where hydrocarbon sector forms a large part of the GDP and imported goods form a big share of domestic consumption.
However, lending to households is a sensitive territory as elevated level of household indebtedness may have implications for financial stability because of its potential to exacerbate the cyclical downturns. Therefore, a close watch on this sector is warranted.
Household indebtedness in Oman is 22 and 45 months of net salary for personal and housing loans respectively. This level of indebtedness is considered high when compared to that in OECD countries. At present, overall, the household credit risk indicators remain at low level and household debt as a percentage of GDP is low.
Moreover, the prudential regulations on lending to households are expected to keep the risks in this sector at manageable levels.

Vinod Nair

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