Banks should aim to diversify lending portfolio: CBO

MUSCAT, NOV 10 – Household indebtedness in comparison with non-oil GDP has risen in years in the Sultanate, fuelled by an uptrend in personal loans extended by commercial banks, according to the Central Bank of Oman (CBO). The apex bank however noted that the concentration of bank credit in the personal loan category did not pose a significant risk in terms of the credit exposure of banks, given that the segment continues to perform well.
“Credit remained concentrated in the personal loan segment, in which lending to households grew steadily over the last five years from RO 7.3 billion in 2014 to over RO 10 billion in 2018,” the CBO said in its newly published 2019 Financial Stability Report. “Moreover, household indebtedness relative to non-oil GDP has risen during the past few years as household credit grew at a faster pace than the non-oil GDP.”
“However, household debt to income ratio stayed broadly unchanged, and the proportion of personal loans to the total lending portfolio remained about 40 per cent. Moreover, regulatory measures and stringent lending standards ensured that this segment continues to perform well with a low non-performing ratio of 2.3 per cent at the end of 2018,” the Central Bank stated.
Discussing potential sources of vulnerability to banks, the CBO singled out the real estate sector as an area that needs “to be watched.’’
This is because real estate exposure to the banking
sector is estimated at around 30 per cent of the total lending portfolio, it said.
“This is considered large as a weakening in the real estate market may expose the banking sector to considerable risks. Furthermore, mortgage financing to households formed around 15 per cent of the lending portfolio or 50 per cent of its real estate exposure. However, at present there is no sign of any significant stress in the Omani real estate market,” the Central Bank noted.
The report also urged banks to be vigilance about the construction sector, which accounts for 11 per cent of total lending, while the non-performing loan (NPL) ration stands at 4 per cent.
“The banks should be watchful about this sector as it is sensitive to economic downturns, and problems in this sector may also spill over to other sectors. Banks should also aim to diversify their lending portfolio further in order to minimize sectoral risks,” it stated.
The manufacturing sector, designated as a priority sector for economic diversification, is expected to see its share of credit rise from the present 8 per cent share.