Loan default
Although the Kerala High Court has barred the use of recovery agents to track and collect defaulted retail and credit card debt, banks have plans to challenge this ruling in India’s Supreme Court. Image Credit: Shutterstock

Dubai: COVID-19 outbreak in India in two waves since March 2020 has come as an unlikely savior for many Indian expatriates who owe millions in defaulted loans to UAE banks and have left the country between 2015 and 2020.

In Early 2020, India and the UAE agreed on making UAE court verdicts on loan defaults enforceable in India, making life difficult for Indians who defaulted on their loans and fled the country.

Following the change in the legal status of such cases, many banks in the UAE had engaged law firms to initiate legal proceedings in India to recover their money from the defaulters. Bankers and law firms now say nothing much has moved forward because of the COVID-19 outbreak in India and the UAE from March 2020.

Clearly, the pandemic has changed the priorities of banks. From the first quarter of last year, banks were more focused on new loan impairments related to the impact of COVID-19 and the historical defaults have been pushed to the back burner

- Head of the legal department of a leading local bank

Cascading defaults

UAE banks faced massive loan defaults between 2015-17 following payment crisis that started in the small and medium enterprise (SME) segment.

Loan delinquencies were largely due to the sudden rupture in the payment cycle in the economy. Following a drastic fall in oil prices from 2013, a combination of fiscal adjustments ranging from rationalising of spending by government-related entities and leading corporates led to delays in payments to SMEs. That resulted in the first stage of loan defaults by a number of SMEs.

In the absence of viable insolvency procedures, business owners who faced legal action and potential criminal proceedings from lenders chose to skip and move back to their home countries.

The loan defaults had a domino effect on the credit quality of banks, as business failures and job losses added to the overall volume of non-performing loans (NPLs).

Huge outstanding

Bankers said the total loan defaults in the SME and retail segment were in the range of Dh30-35 billion and out of this about Dh25 billion is owed by NRI borrowers.

Retail loans including small business loans account for only about 20 per cent of the total defaulted amount while more than 75 per cent account for relatively large business loans in the range of Dh20 to Dh150 million.

UAE banks were keen to pursue big defaulters, with liabilities in excess of Dh2 million through legal channels, while they were more inclined to pursue smaller defaulters through recovery agents in India. However, both the channels have become virtually defunct for past one year as the pandemic has slowed or halted the legal process.

In the case of using loan recovery agents, banks facing big resistance from local law enforcement agencies and courts. Use of collection agents has become illegal following a court judgement. In 2019, a Division Bench of the Kerala High Court held that foreign banks or financial institutions cannot engage recovery agents for realising the defaulted loan amount from a borrower in the country.

India UAE judicial cooperation
To facilitate mutual assistance in civil and commercial matters, India and the UAE entered into the “Agreement on Juridical and Judicial Cooperation in Civil and Commercial Matters for the Service of Summons, Judicial Documents, Commissions, Execution of Judgements and Arbitral Awards” on October 25, 1999 (the Treaty).
Although the Treaty was ratified in 2000, and the UAE gave effect to the Treaty by publishing it in its Federal Gazette in the same year, India had not completed domestic formalities in relation to certain provisions of the Treaty until early 2020.

As a result, successful parties in UAE court proceedings were unable to benefit from the Treaty and often found it difficult to enforce judgments in India. India issued a notification on January 17 declaring the UAE as a “reciprocating territory”. The 2020 declaration means that theoretically, it should now be much simpler and faster to enforce UAE court judgments in India.

The Bench of Justice K. Vinod Chandran and Justice V.G. Arun observed that if the failure on the part of the borrower to pay back amounts to a criminal offence in a foreign country, the bank could initiate criminal action against the borrower through the diplomatic channel.

The court made these observations while disposing of a writ petition filed by a woman from Kollam, Kerala who had returned after working as nurse in Saudi Arabia against attempts by the recovery agent of Al-Rajhi Bank, Saudi Arabia, to intimidate her and compel her to pay the defaulted amount.

Banks to pursue cases

Banks in the UAE contacted by Gulf News said they will continue to explore all legal options in India to collect their dues from loan defaulters. “Our priority will be to pursue big-ticket defaulters who owe us in millions. Many cases are active and once the COVID-19 situation improves, these cases will be reactivated both in the UAE and India,” said the head of the SME section of UAE bank.

Although the Kerala High Court has barred the use of recovery agents to track and collect defaulted retail and credit card debt, banks have plans to challenge this ruling in India’s Supreme Court.