Customers waiting at a UAE bank branch. Over the past five years, total defaults by Indian borrowers in the UAE is estimated in excess of Dh26 billion (Rs500 billion). Image Credit: Supplied

Dubai: Leading UAE banks are understood to be initiating legal action against Indian borrowers who skipped their loan repayment and moved to India.

During the last few years, starting 2016, a number of Indian businessmen and salary earners have left the country leaving behind a trail of loan defaults following stress in the small and medium enterprises (SME) sector which resulted in a domino effect in terms of business failures and job losses.

At the peak of the SME sector stress in 2017, UAE banks’ non-performing loans (NPL) amounted to more than 7.5 per cent of the total loans and was estimated close to Dh9 billion that year with Indian borrowers accounting for a major chunk.

Although the pace of NPL formation has been on a decline in 2018 and 2019 and most banks have deleveraged from problem areas, loan defaults and rising provisions have been a big drain on the profitability of many banks in recent years.

Large defaults

Over the past five years, total defaults by Indian borrowers in the UAE is estimated in excess of Dh26 billion (Rs500 billion).

While a big chunk of the defaults are by business entities accounting for more than 75 per cent of the money owed to the banks, personal loans, mortgages, credit cards and auto loans togethe account for about 20 per cent of the skips.

India’s Economic Times reported on Saturday that at least 9 UAE banks including Emirates NBD and Abu Dhabi Commercial Bank are in the process of initiating legal action against Indian defaulters after Government of India made the rulings of Emirati courts in civil cases enforceable here in mid-January this year.

Although banks did not officially confirm the move, banking industry sources told Gulf News that they are seeking legal remedy and priority will be the recovery of large business loans including some of the large SME exposures. Although the size of the total retail defaults too are significant, banks see the cost of recovery in terms of legal expenses will be larger than the net gains and are likely to go slow on their chase of retail exposures.

Banking industry sources in Dubai have confirmed that many banks are preparing to move Indian courts to recover loan defaults by Indians. In many such cases, there have been UAE court rulings in favour of banks and or there are on going cases in the UAE courts. Banks are now planning to enforce the verdicts by the UAE courts in India. In addition, it is understood new cases will be filed against defaulters.

New ray of hope

Armed with the new government of India ruling that the UAE court orders in civil cases are enforceable in India, banks’ legal departments are hopeful that they will be able to recover at least some portion of the defaults by Indians.

“In many cases where Indians have skipped loan repayments in the past, there were hardly any recourse to recovery as most of these lending were in the unsecured category. Most borrowers don’t have any assets in the UAE while many of them have substantial wealth in India. We hope to recover from these willful defaulters using all legal options,” said the legal department head of a leading local bank.

Banking industry sources in the UAE  confirmed the move and said they are in the process of hiring law firms in India for the new legal push to recover defaulted loans.

Margin pressure

UAE banks are expected to experience pressures on margins and a slight deterioration in sector profitability this year largely from recent interest rates cuts and a gradual decline in asset quality resulting from stress in the real estate sector.

According to data from credit rating agency Standard & Poor’s, in the first nine months of 2019, UAE banks witnessed a slight decline in profitability and the trend is likely to linger into 2020. The return on average assets for rated UAE banks, although high in an international context, declined to 1.5 per cent as at September 30, 2019, from 1.7 per cent at year-end 2018.

The impact of Financial Reporting Standards (IFRS) 9 transition to recognize problem loans is also expected to have some impact on overall cost or risk. With the rise in cost of risk to continue in the current year, analysts expect banks to pursue all means to recover from defaulters while continuing their proactive approach towards cost management.