United Arab Emirates banks cut provisions for non-performing loans by about 40 percent in the second quarter to their smallest since at least 2003, after writing off an estimated $3.7 billion, central bank data showed.

Some of the loans were written off after more than two decades, a central bank official said on Thursday.

Banks in the second-largest Arab economy had set aside 19.26 billion dirhams ($5.25 billion) on June 30 to cover potential losses from loan defaults, compared with 33.15 billion dirhams on March 31, the data on the central bank Web site showed.

In many cases, banks may have removed the bad loans from their balance sheets years ago, though the central bank continued to consider them recoverable, analysts said.

Provision for non-performing loans had not fallen below 30 billion dirhams since the central bank began publishing such data in 2003. Figures were given annually until June 30, 2006 and quarterly thereafter.

Some banks had written off loans after years of non-payment, a central bank official told Reuters.

'These loans were big and very old, more than 20 years,' said the official in the statistics department, who did not want to identified.

The write-off could reflect a change of provisioning policy at the central bank or at some of the commercial lenders, said Raj Madha, banking analyst at EFG-Hermes investment bank in Dubai.

A former chief executive of Union National Bank said some banks had been carrying bad loans from the 1970s and 80s, when construction activity collapsed after rapid growth.

 'The market was unregulated and a lot of loans went bad. It is prudent to write them off because they are old and non-recoverable,' said Anwer Sher, who is now president Sher Consulting. - Reuters