CBO urges banks not to ‘flood’ customers with loans

Muscat: The Central Bank of Oman (CBO) has cautioned licensed banks operating in the Sultanate of Oman against liberal loan disbursements that may result in borrowers being saddled with debt.

The fresh warning came in an advisory published by the Central Bank on the role it continues to play in supporting financial inclusion and safeguarding the interest of financial consumers. The publication, titled ‘Responsible Finance’, recalled an earlier regulatory framework issued by the apex bank in support of consumer financial protection.

“Banks should not flood customers with debts and loans in a way that does not match their sources of income and their ability to repay them,” the CBO said in its advisory issued on Thursday, November 24, 2022.

“When banks provide banking products and services, they should disclose all the relevant details to customers and borrowers in a fair, transparent, clear and complete manner so that they can make well-founded borrowing/financing decisions,” it further noted.

The notification comes amid a significant uptick in household indebtedness in Oman over the past decade. According to the CBO’s latest Financial Stability Report 2022, bank credit to households – typically accounting for around 40 per cent of total banking credit – grew steadily from RO 7.3 billion in 2014 to over RO 10.3 billion in 2019, representing a steep 41 per cent increase during the five-year period (compound annual growth rate of 7.2 per cent).

Lending to households accounted for about 38 per cent of the total lending portfolio of the banks at the end of 2021, it said. After a slump during the recent pandemic, household lending picked up in 2021 with a growth of 2.8 per cent after staying largely flat (0.24 per cent growth) in 2020.

“The relatively modest growth in lending to households during 2020 and 2021 reflected weaker demand due to rising household savings, lower discretionary spending amid uncertainty, changing risk appetite of the banks for fixed-rate longer-tenor loans, and stringent non-price credit terms,” the Central Bank explained in its Financial Stability Report.

The “rising cost of living and interest rates”, the report further noted, had raised concerns about the sustainability of household debt. “Households with lower incomes are disproportionately more vulnerable to the soaring inflation as they have narrower buffers to maintain their debt servicing capacity in the face of rising costs,” it stated.

Significantly, this weekend’s advisory on responsible finance also calls upon customers to be judicious in their borrowing practices. “Be convinced of the actual purpose of borrowing,” the Central Bank stressed. “Make sure that the borrowing is the best solution to meet your actual needs, after exploring all your other options. Avoid, as much as possible, consumer loans that bring no benefit or does not increase productivity. Instead try to increase your savings and reduce unnecessary expenses.”