Non-performing loans of leasing, hire purchase firms in Oman grow

Muscat: Leasing firms in Oman have witnessed a growth in gross non-performing loans (NPLs), mainly on account of a delay in the collection of receivables. This has also resulted in a slightly higher loan loss provision and reserve interest.
The combined gross non-performing loans (NPLs) has increased by 14.38 per cent to OMR68.17 million, while loan loss provisions and reserve interest edged up by 2.1 per cent to OMR63.82 million by the end of September 2016, over the same period of last year.
The slowdown in the economy has resulted in delays in collection of receivables. When the borrowers get payments late, there will be a delay in their payments as well, according to a source in leasing and hire purchase companies, who does not want to be named. In fact, the gross loans and advances of leasing firms in Oman grew by 8 per cent (or OMR81.62 million incremental growth) to OMR1,102.02 million by end-September 2016, according to the latest quarterly report released by the Central Bank of Oman (CBO). However, the combined net profit of these institutions marginally declined to OMR6.88 million for the nine-month period, from OMR7.6 million for the same period of 2015.
“The lending of finance companies is more or less on fixed interest rates for three to five years. Rates remain the same for the entire tenure of the loan. However, banks charge floating rates for their lending to finance and leasing companies. So, when interest rates go up, the funding costs of finance companies go up quickly,” Robert Pancras, chief executive officer of National Finance told the Times of Oman.
Pancras added that although leasing companies charge higher interest rates for new loans, they usually do not revise interest of existing loans, which remain the same for the loan period. Therefore, when interest rates go up, the interest margin for leasing companies fall initially and corrects over time as new higher interest rate loans gradually replace lower interest rate loans done earlier. However, the flip side is that when market interest rates decline, margins initially expand and then gradually correct to normal levels.
With the slowdown in economic activities, demand for funds from both retail customers and corporate sector has also declined.
The leasing finance firms target the medium to small-scale business enterprises and individuals for lending. Oman’s leasing companies mainly operate in three market segments - retail financing, equipment leasing and factoring and working capital financing. In the retail segment, financing is provided to individual customers mainly for purchase of automobiles and other goods whereas in equipment leasing finance is extended to small and medium enterprises (SMEs) for expansion, modernisation and replacement requirements. In the third segment, factoring and working capital financing is provided to SMEs for cross border or domestic trade, or for the execution of projects, usually against the assignment of receivables.
There are currently six finance and leasing companies with a wide branch network spread across Oman and all the six companies are also listed on the MSM.
The six licensed players - Al Omaniya Financial Services, Muscat Finance, National Finance, Oman Orix Leasing, Taageer Finance and United Finance - have a combined asset of OMR1,098.25 million by the end of September 2016, against OMR991.50 million for the same period of last year.