Kuwait CB to enforce provisioning controls
Local banks seek clear guidelines to make credit portfolio
KUWAIT: Kuwait’s Central Bank Governor Dr Mohammad Al-Hashel assured local banks that the Central Bank will enforce certain controls on provisioning from the beginning of next year in order to give bank managements a better perspective about the costs for allowances they are required to make in accordance with their credit portfolio and quality of assets in each fiscal year.
This was reported by Al-Rai recently, quoting sources with knowledge of the situation. The sources indicated that the promises are based on requests made by a number of banks during discussions regarding the basis on which allowances are to be made and whether or not their levels are adequate.
In this regard, the sources - who spoke on the condition of anonymity - indicated that some banking sector officials believe that their respective banks no longer need to make provisions at the current rate in accordance with the Central Bank stipulation.
On the other hand, the sources added, the Central Bank continues its warnings, “based on interior and foreign information, that indicates that unusual allowances remain necessary given the difficulties of markets”. While Dr Al-Hashel accepted banks’ request to set clear controls for provisioning, he made it clear that the Central Bank’s vision on that regard will not be ready before 2014; in the meantime local banks are expected to not change their policies regarding making more allowances until the end of the current year.
According to the sources, local banks are not against the idea of provisioning in principle, but instead of leaving the process to continue under the Central Bank’s unpredictable estimations, they prefer to work according to a clear basis and a mechanism that sets the number of allowances that need to be allocated as per measurable indicators.
“A banking official indicated that when he sends his periodic or annual data to the Central Bank, he holds his breath in anticipation of whether or not he is going to be told to reinforce their allowances”, the sources said.
Figures announced by the Central Bank show that non-performing loans (NPLs) have been covered by allowances of 175 percent by the end of last year. It may also be noted that when making their requests, local banks explained that it is not related to high provisioning levels allocated in the past, but to a desire of setting standards for their future plans. “Bank directors explained to the governor that when they were asked to allocate more allowances in the last few years, it was considered a step necessary to address the difficult financial situations that markets faced”, the sources said. “Now that the situation has improved, they indicate that the process needs a clearer vision”.
Meanwhile, a banking source said: “A better understanding of the magnitude and trends of the judgmental provisions required by the Central Bank will improve the transparency of the sector’s profitability and limit the volatility of earnings”. He added, “with clearer guidelines on the required levels of judgmental provisioning, banks with good or improving asset quality and provision coverage can benefit from the higher risk management standards they continue to apply”.