What is Debt Burden Ratio?
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You might have heard bank sales executives talking about DBR. “Sir, your loan is declined because your DBR is more than 50%.” Then you start wondering what is this DBR?
Simply put Debt Burden Ratio (DBR) is the burden of your liabilities on your income, mentioned in percentage basis. In simple ways it is the ratio of your Debt (loans) against your Income (salary). DBR is usually calculated for individuals. For companies and corporates another ratio called Debt to Equity is calculated. Being an ex-banker who approved loans and credit cards, I fairly understand this concept. DBR is sometimes called Instalments to Income Ratio (IIR) or Debt to Income Ratio (DIR) or Debt Service Ratio (DSR). But it is popularly known as DBR.
How to calculate DBR?
Calculation of DBR is very simple. Following is the formula:
All your monthly liabilities,EMI,Minimum payments to Credit cards DIVIDED by Your income or Salary.
Example: Suppose you have 2 loans with a total of 1500 monthly instalment and your credit card limit is 20000 and your salary is 10000, then your DBR will be 25%.
1500 + 1000(which is 5% of 20000)/10000 = 0.25*100 = 25%
To make things easier for you, I have created an excel file which you can download to calculate your DBR or Debt Burden Ratio.
Why is DBR calculated?
Central Bank of UAE has set up a maximum DBR of 50% for individuals, whether UAE national or Expatriate in their latest regulations. For pensioners in UAE the DBR is 35%. This means, your total monthly EMIs and 5% of your Credit Card payments should not be more than 50% of your monthly salary.
When I came to UAE in the year 2006, there was no formal rule with this regard and banks ended up increasing their risks by over exposure and maintaining a high DBR limit of up to 65%. While banks were happy to lend more, this created an instability in the market where individuals who were loan hungry, took loans and credit cards from various banks and finance companies in UAE.
When the economic crisis came and when people lost jobs, the banks faced huge provisions and losses. This prompted Central Bank to step in and tighten the lending criteria.
Central Bank mandated all lenders that the Debt Burden Ratio can not be more than 50%. This limited a person’s ability to borrow up to 50% of their income or salary. This led to huge improvements in the banking sector where the banks notably lent only to people with this limit. This is one of the most important rules brought in by Central Bank of UAE. Note that this is the Law; if any bank or finance violates this rule, they are breaking Central Bank laws.
This did not deter people from over borrowing!!! How??
Here it is: UAE till recently did not have a credit bureau which collects individual and company loan information. The bank’s credit analysts depended on customer’s latest bank statements and information provided by customers over the phone or in the information sheet for details on monthly EMIs and other liabilities. Clever individuals borrowed from multiple banks by applying simultaneously to many financial institutes. Few got lucky! Imagine if you earned a salary of 10000 monthly and your monthly EMI are around 7000 or 8000, how would you even live here?? Loans of over 250000 only were required to be reported to Central Bank of UAE at the time.
When did the end of overexposure come?
The launch of UAE credit bureau put an end to this practise. Now all your loan and credit card information is mandatorily reported to UAE Al Etihad Credit Bureau and you are not able to apply for excessive loans or over expose yourself.
If you have multiple credit cards with high limit, chances are that your DBR would be higher than 50%. I recommend that you reduce the limits of the cards to minimum and maintain a healthy DBR in order to have a peaceful life. DBR was mandated by Central Bank of UAE to instil some stability and is a very important metric in your financial life.
Why do banks calculate DBR?
Primarily the objective of a bank is to protect its assets ie loans. In order to secure their assets banks like to limit exposure to a single individual as per the Central Bank of UAE mandated rule which is 50% DBR. The DBR provides a good indication to banks about the ability of a person to service the loan repayments or EMIs.
Have you calculated your DBR in the above Excel? Calculate your Debt Burden Ratio (DBR) and check where do you stand. You as a financially literate person should know what your DBR. Calculate now and mention in comments below. For your information, my DBR is around 20%.