With the moratorium on loan repayments – a key policy response adopted by the Omani government for the benefit of pandemic-impacted borrowers – having come to an end on December 31, 2021, the Central Bank of Oman (CBO) has cautioned banks in the Sultanate of Oman to be suitably geared for an uptick in non-performing loans (NPLs).
Total banking credit to the private sector amounted to RO 23.437 billion in 2021, up from RO 22.912 billion a year earlier. Personal loans – a popular source of credit for mainly salaried individuals seeking funding for everything from home improvements and purchases of vehicles and household appliances to weddings, holidays and educational studies – accounted for a hefty 38 per cent of the total in 2021. The Services sector came next with a roughly 10 per cent share, followed by the Construction sector with a similar figure.
The CBO, in its latest Financial Stability Report, has however warned that the moratorium on loan repayments, which was introduced in March 2020, “has somewhat obscured the visibility of problem loans”.
It stated: “The loan moratorium has come to an end in December 2021. Therefore, the risks in these loans will be better captured (in 2022). Moreover, the exit from this regulatory relaxation was timed to coincide with strong recovery and a provision to restructure the loans if necessary without affecting the risk classification.” The apex bank nevertheless added that its “projections of credit risk from deferred loans remain low”.
According to the report, the stock of gross NPLs amounted to RO 1.16 billion at the end of 2021, entailing an increase of 4.2 per cent from the previous year’s total of RO 1.11 billion of the banks’ gross loans.
Net NPLs of the banking sector amounted to RO 362 million or 1.4 per cent of the net loans at the end of 2021, the CBO report noted, adding: “This reflects that the existing loan portfolio of banks is well covered against expected credit losses through adequate provisions with the coverage ratio.”
Significantly, restructured loans – which typically signal the inability of the borrowers to meet their debt obligations when they fall due – climbed to RO 1.61 billion in 2021, up from RO 1.14 billion a year earlier. “As the loan moratorium period stands expired, we expect a significant rise in the restructured loans during 2022,” the Central Bank stated.
Of particular concern is a possible uptick in NPLs from the Construction sector, which registered an NPL ratio of about 13.8 per cent – the highest in 2021. The sector was the third largest beneficiary of banking credit in 2021 which, the report characterised as a “tough year with a lackluster performance for the third consecutive year culminating in a contraction of 2.4 per cent in 2021”.
In contrast, the Personal Loans segment – traditionally the biggest beneficiary of banking credit – posted a less-than average NPL ration of 2.7 per cent in 2021. The report credited the historically low NPL ratio for the household lending portfolio in Oman to “prudential regulatory norms and prudent underwriting standards of banks”. This ensured that lending to households remained concentrated among borrowers with better credit profiles while maintaining adequate provisions, the bank said.
NPLs of businesses, while currently low on average, may not accurately reflect risks in this segment’s loan portfolio, the report cautioned. This because the loan moratorium allowed the affected borrowers to stay afloat during the stress caused by the pandemic, it noted.
In this regard, the apex bank credited banks with carrying out a subjective assessment of their loan portfolios and building adequate loan loss reserves (4.2 per cent of gross loans). Consequently, although NPLs may rise at the end of the restructuring window, they are expected to remain range-bound, the report added.
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