Dubai: NRI investors who borrowed from UAE banks and invested in Indian stocks are facing heavy losses.
Their loan servicing costs in the UAE are set to rise with interest rates increases and as exchange rate losses climb with the rupee weakening. Recent selling pressure on Indian equities resulted in significant value erosion in NRIs’ portfolios. Despite a general tightening of lending standards in the UAE during the pandemic, it was relatively easy for salaried professionals and small business owners to borrow in the UAE based on their proof of income.
The lure of making quick returns playing the Indian stock markets - and frenzied marketing by some of the brokers and portfolio managers - prompted many to make bets on Indian equities last year, even as stock valuations were going through the roof. Apart from personal loans, NRIs were offered loans against their dirham fixed deposits in local banks and NRE [non-resident external] rupee deposits in Indian banks.
A number of UAE banks have partnership arrangements with Indian banks to offer loans against NRE deposits in India, and offer in the range of 80-90 per cent of fixed deposit’s maturing value as loans in dirham. In addition, withdrawal of cash from credit cards or loans offered against credit card limits were used by many to invest in Indian stocks.
All about choice
Bankers said investing in markets with borrowed funds was an individual choice. “We don’t impose conditions on the use of personal loans,” said a senior retail banking official. “In the case of working capital loans [given to business] too, it is difficult to verify the end-use. If borrowers use these funds for other investments, the risk is entirely theirs.”
Irresistible rise
Most NRI investors, even those with little knowledge of the stock markets were sucked into the market frenzy when key indices were on a wild surge following initial pandemic shock.
“Until mid-January, everything looked perfect,” said Rakesh Gajra, a portfolio manager and an investment consultant. “Rising inflation, gaps in macro data, conflict in Ukraine and rising global interest rates have seen volatility rising. We expect the conditions to remain jittery over the next six-months.”
The BSE Sensex had hit a low of 27,590 on April 3, 2020. - and surged to its peak of 61, 223 on January 14, 2022. The market has been a roller-coaster ever since, wiping out billions in market cap. (Despite the recent gyrations, over a five-year horizon the Sensex gained 94 per cent.) A perfect storm?
The turbulence in the Indian markets are likely to get extended by several domestic and external factors affecting the economy.
A rise in global interest rates saw substantial withdrawal by foreign institutional investors (FIIs) from Indian markets, pulling out Rs410 billion in March ahead of rate hikes by the US Federal Reserve. FII flows (as a percentage of market capitalisation) are now at decade-low levels, according to a recent HSBC report.
“A prolonged conflict may still trigger further selling − we estimate around $7-8 billion outflows in such a scenario, similar to the levels seen during the global financial crisis,” the bank said. “Global liquidity tightening and inflation remain overarching concerns as well.”
“Lending against fixed deposits [in India or UAE] are fully collateralized and the margin calls are not necessary as the loan values are significantly lower than the fixed deposits held as collateral.”
Multi-layer risks
For NRI investors who bought Indian shares with foreign currency borrowings, risks are manifold. As stock valuations shrink, their debt burden ratio to equity value will see a steep rise. While rising interest rates add another layer to the gross debt burden, the real value of their portfolios shrink as inflation bites.
NRIs also face forex risk on their borrowed funds as Indian rupee has been facing sharp depreciation.
