A teller at a bank in Dubai
A teller at a bank in Dubai. Indian borrowers have defaulted on an estimated Dh26 billion loans from the UAE banks since 2016. Image Credit: Gulf News Archives

Dubai: A Number of UAE banks are preparing to initiate legal action against loan defaulters including retail borrowers whose total defaulted debt is more than Dh250,000, banking industry sources told Gulf News.

Although the immediate priority will be to chase big ticket corporate and business loan defaulters who owe several millions to banks in the UAE, defaulted retail loans in excess of Dh250,000 will also be pursued, bankers said .

Initial estimates suggest that Indian borrowers who fled the country after defaulting on their loan obligations owe banks operating in the UAE in excess of Dh26 billion (Rs500 billion).

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.

While some banks have hired law firms in India to pursue cases in Indian courts, many are in the process of devising a strategy to recoup loan losses from willful defaults.

Cost of recovery

“Cost of loan recovery will be a major consideration before we initiate legal action against any defaulter. While hiring our lawyers, we will consider cost per case and decide on the viability of each case,” said the legal department head of a local bank.

Law firms in India have indicated that banks are negotiating on legal fees on the basis of bulk of recovery cases rather than the number of cases. If that is the case, both big and small loan default cases can be bundled together making the legal costs cheaper for banks.

The average legal cost of each individual court case in India could amount between Dh100,000 to Dh150,000. Thus, if the amount to be recovered is less, there will be less incentive to pursue such cases. However, with large number of cases of varying defaulted amountes to be initiated, banks’ legal departments are hoping to bring down the average cost per case and pursue more cases, even those with lower loan default amounts.

Although banks’ priority is to go after larger corporate and small and medium enterprise (SME) owners who defaulted on their loans, with banks hiring law firms in India, smaller retail loan defaulters also could face the heat in the near future.

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 in that year with Indian borrowers accounting for a major chunk.

GCC banks join fray

In addition to the UAE banks, a number of GCC banks too are seeking legal option in recovering loans defaulted by Indians. Reportedly, along with leading UAE banks such as Emirates NBD Group and Abu Dhabi Commercial Bank, GCC banks such as Doha Bank, National Bank of Oman and National Bank of Bahrain too are seeking legal action against Indian loan defaulters.

In the case of UAE banks, a recent Government of India ruling that makes the verdicts of Emirati courts in civil cases enforceable in India strengthen their cases. Lawyers said other GCC banks that have extended loans through their UAE branches, the recent Government of India ruling is applicable and they can seek legal remedy using UAE court rulings enforceable through Indian courts. But in cases where GCC banks granted loans to Indians outside the UAE, they will have to file cases directly in Indian courts.