All 15 commercial banks operating in Oman have tightened up on loan approval and recovery procedures to arrest fresh growth, if any, in bad loans.
In certain cases, non-performing loans still seem to be acting as a drag on banks’ operational efficiency, and even transaction costs. Banks have also increased the frequency for monitoring existing loans to avoid emergence of fresh bad loans.
The domestic banking industry profit witnessed one of the biggest-ever falls of over 84% in fiscal 2003 to a meagre OR9.6mn compared with OR61.9mn recorded in the preceding year.
The sector provided nearly OR118mn against bad and doubtful debts and investments. In fact, it was not more than the market expectation. The dismal performance can be significantly attributed to the heavy provisioning against bad loans. More significantly, the poor performance should be attributed to the huge loss of about OR52mn reported by the country’s second largest bank, National Bank of Oman (NBO).
If the NBO loss is excluded, the sector profit stands higher at OR70.7mn. NBO has reported good profits for the first two quarters of 2004. However, the year-end results are unpredictable.
The sector provisions were OR64.4mn in 2002 and OR103.5mn in 2001. The initiatives of the Central Bank of Oman for faster recovery of NPLs are most welcome. However, actual results on the ground will largely depend on what is practical. Banks should be told to develop further robust internal control systems, management information systems and early warning triggers.
The steps taken by the banking regulator have made significant progress in several areas such as strengthening of banks’ balance sheets. Among those measures, the capital adequacy ratios; internationally acclaimed asset classification norms; monitoring exposures to credit risk, developing internal systems for risk management; enhancing transparency and disclosure and improving management practices and corporate governance stand crucial. Interest income of banks declined by 8.9% in 2003 to OR265mn on falling interest rates.
Interest expenses recorded a fall of about 21% at OR81.2mn. The decline can further be attributed to the sluggish growth in overall credit. Operating expenses rose by 2.2% during the year.
In addition to the six local commercial banks, there are nine foreign banks operating in Oman. They are: HSBC Bank Middle East, Standard Chartered Bank, SBI, Habib Bank, Bank Melli Iran, National Bank of Abu Dhabi, Bank Saderat Iran, Bank of Baroda and Banque Banorabe. The US banking major Citibank closed down its Muscat operations from April 1, 2004.