In my last column, I talked about the basic consequences of not looking to macro economic and political trends and developments in countries or regions that the UAE is closely intertwined with, and the import of this to lenders in this country.

To illustrate how seemingly distant eco-political events can have an almost instant and devastating impact on inter-linked economies, let us look at recent developments at one of the UAE’s major trading partners, India. This case is quite different to that of Nigeria’s, which we briefly looked at earlier. The Indian economy is fairly robust, the rupee stable and there is no immediate economic or political threat on the horizon.

Yet the clouds darken …

The Indian government and the Reserve Bank of India have finally decided to act on the gargantuan $37 billion non-performing corporate loans that afflict the banking sector. They have introduced a bankruptcy law, and having waited fruitlessly for businesses to come forward to address their delinquent loans issue are pushing defaulters into finding solutions or to file for bankruptcy.

This should have been done a few decades ago. But a sordid collusive culture that developed between bankers, corporates and governments ensured continued funding for unviable companies, losses being camouflaged and non-performing loans being kept alive through nefarious practices. All this is now ending and dozens of companies are likely to file for bankruptcy.

This will affect corporates and SMEs in the UAE and therefore banks as well over the coming months, and perhaps even years, with thousands of Indian companies likely to go under or restructure their liabilities. There are numerous linkages that will cause local stress. Here are some major ones.

Firstly, there are hundreds of Indian companies that are either buyers or suppliers to UAE companies. If they start going under, there will two implications. One, a business risk if a UAE company is highly dependent on an Indian company (sales or purchases will be seriously affected). Two, the ability of Indian companies to pay for imports will be affected and result in bad or doubtful debts to UAE firms.

There are dozens if not hundreds of subsidiaries of Indian corporates here whose parent companies may be affected. These may be borrowers from local banks. There are two dangers — business risk resulting from the nature of dependence on the parent entity and, second, a serious risk of the subsidiary borrowing here to finance the parent. This borrowing may come in several forms not all transparent to lenders.

It is a well-known fact, not always recognised, that dodgy Indian parent entities have set up subsidiaries here for the express purpose of boosting consolidated sales by undertaking false trades — i.e., trade with no movement of goods or exchange of services. Paper transactions to be blunt. Many have also borrowed from banks and will be worse hit.

There is the risk posed to the Indian financial system with massive write-offs looming. This is possibly the least important of UAE banks’ apprehensions, as bank failures have not been permitted to occur by the RBI. In addition, the Ministry of Finance has already identified 21 lenders of the largest government-owned banks for consolidation. This will strengthen balance-sheets and create more stable organisations.

As always, when the aftershocks of a credit binge start hitting an economy, it is the weak companies that perish first, followed by those of increasing size and “strength”. All of 2015 and the first-half of 2016 saw massive delinquencies in the SME space, moving up to larger companies (the “commercial banking” area) and now onto the big ones (in the “corporate banking” space). This will also take down a few SMEs who buy and supply to them.

The banks’ answer to historical shocks has been a cessation of lending to SMEs and mid-sized companies. New markets are not being sought — so how long is this sustainable?

Banks have once again taken a universal and unanimous view that the market is in tatters and that the only safe lending is of the “secured” kind. This is not a tenable strategy. Lending has to resume, albeit done differently.

The fact that there are opportunities is evidenced by the fact that several overseas lenders are entering the market, but that is the subject of another discussion. Meanwhile, a plausible lending strategy that assumes tough market conditions and caters to all deserving customers is the need of the hour.

The writer is the head of Vianta Advisors.