Dubai: Indian borrowers who defaulted on their loan repayment commitments in the UAE and fled the country between 2015 and 2021 will find it hard to escape the long arm of law and or loan recovery agents in 2022.
According to banking industry sources, Indian borrowers, both big and small, together, owe more than Dh25 billion to UAE based banks and many have fled the country.
COVID-19 outbreak in two waves since March 2020 had significantly slowed down banks’ efforts to recover their money either through engaging collection agents or through in Indian courts or law enforcement agencies.
Collection agents back in business
Frustrated with delay in recovery of defaulted loans through Indian courts and other legal channels, many banks are understood to be seeking the help of collection (loan recovery) agents in India and or have sold their distressed loans to third party loan recovery companies.
While the collection agents work with banks on a pre-agreed share of the recovered bad loans, some loan recovery companies take over a specified portfolio of bad loans at a significant discount and use their resources to recover the loan from the defaulters.
Delays in legal processes
Legal departments and lawyers of many banks told Gulf News the recovery process through courts in India are very expensive, uncertain and time consuming.
“Except in cases where large sums are involved, say a default of more than Dh50 million, chasing it through courts don’t make much economic sense. While large sums are needed to be spent on legal fees, there is no certainty on the time frame for the dispute resolutions,” said the legal head of a prominent local bank that has many such cases in India.
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 second quarter of 2020, 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
UAE banks faced massive loan defaults between 2015-18 payment crisis 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.
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).
Although, most of these defaults have been recognized as bad loans, bank managements are keen to recover this money.
“It is the money of our shareholders. It is important for bank managements to spare no efforts to recover this money from defaulters,” said the Chief Financial Officer of a local bank with significant exposure to such loans.
A few people who have skipped their loan repayments and have left the country told Gulf News, that in recent months, UAE banks, through their collection agents have ramped up their efforts to trace them.
Ravindran Nair (name changed) who ran an aluminium fabrication business who left behind a bad loan of about Dh1.5 million told Gulf News that banks’ collection agents have traced the addresses of his parents, in-laws and close relatives and are in constant contact with them to get his whereabouts.
In most cases collection agents are able to trace the defaulters using the address, phone numbers and contact details they provided while applying the loan.
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, 2020 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.
Banks are facing big resistance from local law enforcement agencies and courts in the use of recovery agents. 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.
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 use all options
Despite the legal and operational difficulties, banks and their legal representatives told Gulf News that all options will be used to recover these loan defaults.
“In cases where large sums are involved and the defaulters are traced, we will continue to pursue them through courts. But where the sum involved is relatively small, we would rather engage a collection agent or even sell the outstanding at a viable price,” said the legal head of a local bank.