Indian borrowers have defaulted on an estimated Dh35 billion in loans between 2015 and 2019 and fled the country. Image Credit: Ahmed Ramzan/Gulf News Archives

Dubai: Indian borrowers have defaulted on an estimated Dh35 billion in loans between 2015 and 2019 and fled the country.

While banks have not been successful in recovering most of these, a few borrowers who Gulf News contacted said the chances of making the repayment in full are dim as they simply do not have the resources.

Abraham Thomas (name changed), a businessman who owned two steel fabrication units, a goods vehicle body building workshop and did projects for large construction companies across the UAE skipped his loan obligations and fled the country in 2018.

Thomas’ story is typical of many borrowers who opted to flee.

“Many large contractors failed to pay me on time. I bought inventories and managed payrolls with borrowed money. When the payment cycle got ruptured banks began calling me. To keep the business going and settle some of the bank loan installments, I borrowed from money lenders. Eventually I had to run away from my borrowers,” said Thomas.

Money lenders have their network in India to recover their money through coercion tactics. Thomas was forced to sell most of his family property to settle their debts. Banks on the other hand are restricted to legal channels of claiming their money.

Legal channels of chasing defaulters in India are very time consuming and expensive. The COVID outbreak since March 2020 has slowed down banks’ efforts to pursue the loan defaulters.

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 proceedings in India to recover their money. Bankers and law firms now say nothing much has moved forward because of the COVID outbreak in India and the UAE from March 2020.

“Hiring a law firm in India is expensive. Especially when you know the process is going to be long drawn and if the defaulter can prove he is bankrupt the chances of recovery are dim. After the COVID outbreak many banks are reassessing their loan recovery strategy,” said the head of SME [small and medium enterprises] business in a local bank.

Scope of India - UAE judicial cooperation treaty
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 17 January 2020 declaring the UAE as a “reciprocating territory”. The 2020 Declaration means that 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.

Why defaults?

Some bankers blame reckless borrowing and use of funds for other needs other than the businesses the main reasons for the crisis.

“We have seen cases where some of these business owners diverted funds to acquire luxury homes and cars and when the payment cycle ruptured they had no liquidity to service the loans and operating expenses,” said the CEO of a medium sized UAE bank that holds a substantial impaired SME loans portfolio.

Defaulting borrowers have a slightly different story to tell.

“It is not fair to categorise all loan defaulters as reckless. I serviced all my loans up to the second half of 2017. Delays in payments resulted in loan defaults and banks stopping the credit lines. It is not that I used the loans to fund luxury consumption. On the contrary, I had a huge inventory of automobile parts, two workshops and 70 employees when I left the country,” said T Rajendran, a Sharjah-based business man.

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.

“I spent nearly 30 years in the UAE working and running various businesses. I am not happy about what has happened to me. But unfortunately there is no way to chase those who owe me money and repay those whom I owe,” said Rajendran who now lives in a modest apartment in Kochi, central Kerala.

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).

What next?

Bankers’ insist they will continue to pursue defaulters, especially the large ones.

“We have engaged law firms in India to assess the possibility of recovery of large defaults. We will act on their advice,” said the head of legal department of a local bank.

Many borrowers claim that some law firms and credit recovery agents have complicated the issue in the initial stages of loan default.

“I had plant and machinery worth over Dh8 million and a viable business if not for the liquidity crunch. All my attempts to sell the business and repay a substantial chunk of the loan was scuttled by banks’ recovery agents,” said Thomas.

Beware of middlemen

Many small borrowers (who have obligations under Dh250,000) too say recovery agents and middlemen are trying to make a killing on the possibility of settling loan outstanding with the banks.

"I had a total obligation of Dh170,000 in credit card debt and a personal loan when I lost my job and had to leave the country. I planned to organize funds from home by selling my house and repay the bank. COVID has delayed the process. Now, I see my debt is in excess of 250,000 in accumulated interests and fines,” Abdulla Kunhi, a former bank employee.

Kunhi said he engaged an agent in Kochi to talk to the banks for a viable settlement. Although the agent claimed he has contacts in the UAE, nothing has materialized yet and in the meantime the agent has collected nearly Dh4000 in fees.

Many small borrowers like Kunhi are keen to settle their loans and pursue careers or businesses in the UAE. But unfortunately, many say, sitting in India there is no transparent way of dealing with banks directly.

Limited options

In the case of using loan recovery agents, banks are 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.

“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 in terms of loan recovery,” said the legal department head of a local bank.

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. 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.