What is your Debt-Burden-Ratio?

UAE salaries

If you are like the vast majority of UAE residents, you don’t know what a DBR is. Unfortunately, in this case, ignorance is most certainly not bliss! Let’s try to get you up to speed quickly so that the next time a banker throws this loaded term casually in to a conversation, you are able to respond quickly and professionally.

It all starts with Article (7) of UAE Central Bank Regulations “Regarding Bank Loans & Other Services Offered to Individual Customers” published in February 2011. This very important article talks specifically about installments, and how much of your income can be put towards the repayment of regular monthly installments.

Article (7) states:

Repayment Installments:

  1. a) Deductions from salary or regular income of any borrower, for all types of loans extended by banks and finance companies together, including, but not necessarily restricted to, car and private housing loans, overdraft facilities, and credit cards faculties, must not exceed 50% fifty percent of his gross salary, and any regular income from a defined and specific source at any time.” (Emphasis added).

But, what does this mean?

Let us use the example of Nadine. Nadine is an expat living in Dubai. Like most other people, Nadine has a car (nothing too flash!), a couple of credit cards that she uses modestly, and a small overdraft facility with her primary salary-account bank. Her biggest expense is a mortgage on her apartment in a rather nice part of town, but it nothing that she cannot manage. Nadine is an accountant with a large multinational company, and is paid AED 40,000 per month. She is financially OK.

Here’s what her situation looks like:

  1. Car Loan: AED 1,800 per month.
  2. Credit Card 1:
    1. Available limit: AED 50,000.
    2. Average utilization: AED 3,000 per month.
  3. Credit Card 2:
    1. Available limit: AED 60,000.
    2. Average utilization: AED 3,000 per month.
  4. Mortgage: AED 10,500 per month.
  5. Overdraft facility:
    1. Available limit: AED 30,000
    2. Average utilization: AED 0 per month.

In order to calculate Nadine’s DBR, we need to first calculate her “Debt Burden” – those costs that would be included in any calculation of her outstanding recurring debts. We calculate this as follows:

  1. Car Loan – AED 1,800 – Included in DBR calculation.
  2. Credit cards – 5% of the credit limit on all your cards combined would be included in the DBR calculation. For Nadine, 5% of AED 110,000 is added to the calculation of her Debt Burden – AED 5,500.
  3. Mortgage – AED 10,500 – Included in DBR calculation.
  4. Overdraft Facility – 2% of the available limit of AED 30,000 will be added to the calculation of her Debt Burden (it may vary slightly from institution to institution) – AED 600.

Nadine’s Total Debt Burden: AED 1,800 + 5,500 + 10,500 + 600 = AED 18,400.

Now, if we divide her monthly debt burden – AED 18,400 – by her income – AED 40,000 – we can calculate Nadine’s DBR at 46%.

This is fine, although it is approaching the limit of 50% set by the Central Bank.

What happens though if something changes in Nadine’s life? For example, she loses her job and is forced to accept a lower salary of AED 35,000 to stay on in Dubai? After all, she has built a life here, and she is sure that she can get back to where she was in a couple of years, once “things stabilize”. With her new slightly lower salary, Nadine’s DBR is now at 52%. Again, not world-ending, but definitely worth watching.

And with the Credit Bureau’s reports available to banks 24/7, perhaps one or two of Nadine’s lenders would be watching her situation carefully to see how it evolves over time.

If anything else were to change in Nadine’s situation – if her financial situation were to deteriorate in the slightest – she would find it increasingly difficult to obtain further credit at competitive rates. Because of her profile, she might still be eligible for more credit, but with lenders who would now factor in the increased level of risk associated with lending to Nadine. She might end up borrowing at 2-3% above the market rate, because she is no longer eligible for the “best-in-class” rate that is available to people with excellent histories.

More importantly, as Nadine’s credit commitments have grown, and her DBR has increased, her Credit Score will have declined. The Credit Score is predictive and dynamic in nature. With each additional form of debt that Nadine adds, her Score declines, meaning that her risk of default in the future has gone up. As the Score declines, her cost of borrowing, the speed at which applications are approved, the overall benefits provided by lenders, all may be impacted. In turn, as Nadine’s cost of borrowing goes up, her DBR is further negatively impacted. As you can see, it’s not a pleasant cycle to be stuck in.

My advice to everyone is – know your situation. Calculate and manage your DBR proactively, otherwise your DBR will start managing you. After all, knowledge is power – and when it comes to your financials, the power should be in your hands.

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