Life will soon become uncomfortable for Indians who skipped loans in the UAE and fled home. The move to make the UAE court verdicts enforceable through Indian courts will turn up the heat on defaulters on the run.
UAE banks have been suffering loan defaults on a massive scale from early 2015, largely due to the sudden rupture in the payment cycle. Following a drastic fall in oil prices from 2013, a combination of fiscal adjustments, rationalising of spending by government-related entities and leading corporates led to delays in payments. That resulted in the first stage of loan defaults by a number of small and medium enterprises (SMEs).
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).
The move to chase UAE loan defaulters in India will come as a disincentive to engage in irresponsible borrowings.
While business failures and loan defaults can be attributed to the contraction in the economy and payment delays, borrowers and banks too need to share the responsibility. In the post-financial crisis years, especially from 2011 to 2014, banks aggressively expanded their balance sheets, partially compensating for the deleveraging and slower loan growth. In their haste to acquire quality assets and improve margins, smaller banks increased their share of unsecured lending to businesses and individuals. Without collateral, banks had no control on how the loans were utilised.
That’s when irresponsible borrowing crept in. In many cases, people borrowed far beyond their needs to fund luxury homes, cars and fancy holidays, hoping to repay from regular cash flows. When the payment rupture hit the top of the corporate pyramid and percolated down, defaults became commonplace.
While the pace of loan skips and NPL buildup have declined in the last two years, banks have restructured their balance sheets and written off the losses. The bad loans have been a major drain on the profitability and returns on assets. The pile of legacy loan defaults remains unresolved in most cases. However, a recent ruling by the Government of India has come as a ray hope for UAE banks to recover money from absconding Indian borrowers. It is unclear how long it will take for banks to recover their money and at what cost. But the move to chase the defaulters will come as a disincentive to engage in irresponsible borrowings.