Dubai: A sharp rise in interest rates, changes in rules on cheque defaults in the UAE and the IFRS-9 accounting rules on recognizing expected credit losses in advance are complicating the recovery of defaulted loans, especially from non-resident Indians who have fled the country.
A large chunk of the loan defaults is by Indian borrowers who defaulted on their loan repayment in the UAE and fled the country between 2015 and 2021. According to banking industry sources, defaulted Indian borrowers owe more than Dh25 billion to UAE based banks and many have fled the country.
While COVID-19 crisis put the recovery process behind by two years, banks are discovering that the new cheque rules, accounting standards and rising interest rates will make it harder for banks to recover their loan dues.
New cheque rules
The UAE’s new law on decriminalisation of bounced cheques that became effective on January second this year will become a major hurdle for banks to legally pursue loan defaulters who fled the country.
Most defaulted business loans by small and medium enterprises (SMEs) are either unsecured or partially secured with inadequate collateral. Most of these loans were guaranteed with post-dated cheques.
“Under the earlier law, bounced cheques were treated as a criminal offence in the UAE and banks had the option of pursuing criminal proceedings against the defaulters in both the countries,” said the head of the legal department of a local bank. “Civil cases are exorbitantly costly and very time consuming to get a judgement in India.”
Although the new amendments to the Commercial Transactions Law come with tough administrative penalties for issuing cheques without sufficient funds, lawyers and bankers say when defaulters are not in the country, civil proceedings here are pointless.
Curbs on collection agents
Debt collection agents appointed by UAE banks in India are finding the going very tough. Many debt defaulters who were in hiding or were living in different addresses in India are back in their hometowns. Debt collection agents say they longer can use coercive tactics as they could get into legal trouble in India.
Our agents no longer use intimidation tactics or any form of coercion on loan defaulters. Even speaking to them on the importance of loan repayment has become difficult as many of them have engaged lawyers
Debt collectors say getting police help on loans defaulted abroad is impossible without filing a criminal or civil case before a magistrate, locally. Again, these cases fall into the bailable category and could take several years to get a final ruling from courts.
The 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 recovering the defaulted loan amount from a borrower 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 a 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.
Defaulters get the upper hand
The UAE has been following IFRS-9 reporting standards in recognizing bad debts since January 1, 2018. These accounting standards require banks to make provisions on expected credit losses.
Bankers say this rule is giving an undue advantage and extra bargaining power to borrowers.
“Once the defaulting borrowers know their loans have been recognised as impaired, they or their lawyers start negotiations to settle the loans at as low as 25 per cent of the outstanding,” Group CEO of a local bank told Gulf News. “This along with the now decriminalized cheque rules have weakened banks’ ability to recover impaired loans.”
Impact of higher rates
A rapid rise in interest rates in the UAE is expected to substantially increase the debt burden of defaulted borrowers. The Central Bank of UAE raised interest rates by a quarter of a per cent earlier this month. The overall interest rates are expected to go up by 1 to 1.5 per cent this year.
Lawyers say the rising total debt burden will become a disincentive even for those who were considering some form of loan settlement.
We often advise our foreign bank clients to be willing to settle for a reasonable amount with a convenient repayment schedule. Our role has become more of negotiators
Legal departments of local banks, external lawyers in India and collection agents say there is a lack of clarity on how to pursue cases against loan defaulters from foreign countries in India.
In Early 2020, India and the UAE agreed on making UAE court verdicts on loan defaults enforceable in India. While the agreement remains on paper, nothing much has moved forward. Clearly cost and time is two factors that have kept banks from pursuing these cases through courts in India.