MUSCAT: Commercial banking credit to the Omani household sector grew 4.8 per cent to top RO 11.4 billion in 2023, according to the Central Bank of Oman (CBO). This compares with a growth rate of 2.8 per cent in 2022 and 3.3 per cent in 2021, it noted in its latest Financial Stability Report.
The apex bank credited the consistently strong personal lending trend in Oman to relatively “affordable” borrowing rates for the household sector, which currently accounts for 37.7 per cent of the total lending portfolio of banks. “The banks’ appetite for lending to households remained strong, as banks continued to offer loans at less than the personal loan ceiling interest rate of 6 per cent. Thus, despite the high policy rate, the borrowing costs for households remained affordable, thereby sustaining their demand for credit,” the Central Bank stated. The demand for household credit is expected to remain buoyant in 2024 as well, it added, citing the findings of its latest Credit Conditions Survey.
Relative to deposits, the net borrowings of households rose by 5.8 per cent in 2023, according to the Financial Stability Report. Moreover, household indebtedness relative to nominal non-oil GDP increased to 41.1 per cent in 2023, up from 38.1 per cent a year earlier. To ensure that high household indebtedness does not pose significant risks to banks and the broader national economy, the Central Bank continues to require lenders to put in place a set of prudent measures. “Elevated levels of household debt increase the vulnerability of household to economic shocks, which can lead to higher default rates on loans and mortgages,” it cautioned. “Moreover, a sharp correction in housing prices can exacerbate these risks, as it can erode the value of collateral underlying mortgage loans.”
As a safeguard against excessive household indebtedness, the CBO sets limits on consumer financing that are tied to borrowers’ repayment capacity, typically measured by income levels. “By aligning aggregate loan limits with borrowers’ ability to repay, CBO aims to prevent households from taking on debt burdens that exceed their financial means, reducing the likelihood of defaults and financial distress.”
This is in addition to a quantitative ceiling imposed on banks’ lending to households, thereby curbing the extension of credit beyond prudent levels. Importantly, household debt is locked in at a fixed interest rate, with the result that any rise in interest rates since early 2022 has not impacted the affordability metrics of household debt. Furthermore, much of the lending goes to households with strong credit histories or considerable home equity, thereby ensuring the resilience of the sector.
“As a result, the historically low non-performing loan (NPL) ratio for the household lending portfolio in Oman indicates a high level of credit quality,” the Central Bank stated, noting that it stood at a “below-average” NPL ratio of 2.4 per cent in 2023. In contrast, the construction sector, ranking third in credit allocation from banks (after the service sector in second place), exhibited the highest NPL ratio, reaching around 14.5 per cent last year. “Historically, the construction sector has shown lackluster performance even before the onset of the pandemic. However, with significant upcoming projects in Oman, including Sultan Haitham City, the UAE-Oman railway, and Al Khuwair Downtown, among others, there is an expectation for an improvement in asset quality and lending to this sector,” the Central Bank noted. The Manufacturing received a 7.6 per cent share of total banking credit, last year. However, lending to SMEs, while inching up slightly n 2023, remained at a meagre 2.9 per cent of total credit, it added.
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