Banks in the United Arab Emirates are cutting credit lines to small- and medium-sized businesses (SMEs) after a spate of defaults, posing a threat to one of the economy's main drivers.

As weak oil prices prompt a drying up of bank liquidity, some lenders are becoming choosier, taking longer to approve loans or asking for more paperwork, while others are cutting lending or recalling loans, say businesses and bankers.

While the trend is mainly because of banks' desire to protect capital, banking sources say some smaller lenders have also been told by the central bank to limit exposure to the sector. Nobody was available to comment from the central bank.

The dislocation in the lending market risks undermining a push by the government to support SMEs, which make up about 60 percent of UAE gross domestic product. The government has targeted raising their contribution to 70 percent by 2021.

But what some bankers say is a tide of business people fleeing the country with unpaid debts has shaken banks' confidence and exposed shortcomings in insolvency regulations.

In a country where a bounced cheque risks landing the issuer in jail, many heavily indebted expatriates have opted to depart in recent months. A senior banking official in November estimated the amount owed by those fleeing reached around 5 billion dirhams ($1.4 billion) last year.

Some of the businesses that remain report increasing difficulties with banks.

One of those is Alisa Trading, a re-exporter of dried fruits, nuts and spices, which has operated in Dubai for around 25 years. The company said it had an 11 million dirham trade finance facility canceled by Standard Chartered in 2014, then another facility of about 3.5 million dirhams revoked by United Arab Bank in 2015.

LONG RELATIONSHIPS

Another bank, RAKBANK, declined to renew a 1 million dirham financing it had with the lender when it expired in November, Alisa said.

None of the lenders were available to comment on Alisa's case.

"We had long relationships with the banks and never defaulted. We were A-grade customers," said Khaled Chassebi, manager of Alisa.

The company is part of a trading sector that forms the engine of local commerce but started to sputter last year when commodity prices began to sink. Traders of food, oil, textiles and jewelry were worst affected and are now finding it toughest to secure funds.

When Alisa's facilities were revoked, the company had to source loans at higher rates in order to pay suppliers for goods, Chassebi said. He said the company's turnover was expected to halve this year to 100 million dirhams. It has already shed staff and warehouse space.

Privately, several bankers said they had withdrawn or, in certain cases, recalled credit facilities given to commodity traders and other sectors deemed risky, with one saying his bank had targeted companies with debt higher than turnover and with credit from more than a handful of banks.

With SMEs only accounting for about 3.8 percent of total bank loans, the fallout from the sector's stress should be relatively contained. Still, after a buildup in losses, several banks have lately taken steps to trim their SME business.

LARGER COMPANIES

United Arab Bank for instance is winding down its SME unit to focus on larger companies after its 2015 earnings were hobbled by a more than doubling in provisions.

RAKBANK said it was committed to the SME segment but was focusing on growing its presence among larger companies. Union National Bank (UNB) has tightened lending criteria for new SMEs, according to banking sources, while Mashreq said it too had tightened lending rules for new SMEs. UNB declined to comment.

Several international banks including Standard Chartered and HSBC have also pulled back from the UAE's SME sector in recent years.

Standard & Poor's expects the ratio of non-performing to performing loans for the banks it covers in the UAE to climb to about 4 percent or higher over the next four to six quarters, still below the 5.1 percent level reached in 2012 in the wake of the 2009 financial downturn.

Still, analysts warn the tide of bad debt could rise, as some banks have not yet fully accounted for all bad loans due to using different numbers of days to calculate defaults.

In the meantime traders are complaining about long delays in getting approval for credit as banks ask for more paperwork, marking a contrast with recent years when small businesses gorged on credit after banks began to view them as a relatively untapped and profitable lending avenue in a buoyant economy.

"In a negative economic environment, as soon as banks sniff a problem in a particular sector, there can be a collective rush to immediately reduce their exposures to that sector," Omar Rahman, general counsel of Noor Bank, said.