Saudi Banks Told to Reschedule Loans of Clients Hit by Cuts

  • Local banks need customers’ approval to overhaul the loans
  • Debt taken out since wages, bonuses were cut are not included

Saudi Arabia’s central bank directed local lenders to reschedule the consumer loans of clients affected by last week’s decision to scrap the bonuses and allowances of many state employees.

QuickTake Saudi Arabia’s Strains

The Saudi Arabian Monetary Agency, as the central bank is known, said in a statement late on Sunday that the step was part of efforts to “reduce pressure on borrowers” whose income was cut by the government’s Sept. 26 package of measures to further trim spending.

The agency said local banks must obtain the client’s approval before changing a loan. Borrowers should present proof that their income has been affected by the recent cuts to the nearest bank branch, the regulator said. Loans taken after the cabinet decision won’t be rescheduled.

Under Deputy Crown Prince Mohammed bin Salman, the world’s biggest oil exporter has already delayed payments owed to contractors and started cutting fuel subsidies as it tries to manage the impact of lower oil prices. The measures may help narrow the budget deficit to 13 percent of gross domestic product this year and below 10 percent in 2017, according to International Monetary Fund estimates.

“Rescheduling bank loans is necessary as real incomes have fallen,” said John Sfakianakis, director of economic research at the Gulf Research Center. “The measures buy citizens some time and allow banks to avoid exercising non-performing loan clauses. However, both would be impacted due to falling purchasing power.”

The cancellation of bonuses and allowances -- and a simultaneous decision to lower ministers’ salaries by 20 percent -- further spread the burden of shoring up public finances to a population accustomed to years of government largesse. Yet analysts have warned the cuts risk deepening the kingdom’s economic slowdown by damaging consumer confidence.

The economy expanded at an annual rate of 1.4 percent in the second quarter, the statistics agency said over the weekend. Non-oil industries grew 0.4 percent, largely due to the government’s contribution, while private-sector activity was flat. In July, data released by the agency showed that the economy expanded 1.5 percent.

The Tadawul All Share Banking Index dropped 2.6 percent at the close on Sunday, compared with a 3.1 percent decline in the benchmark measure.

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