On Agenda: New complexities in approach to loan defaults, bounced cheques

Truth, it is said, can mean different things to different people, depending on which side of it they stand. So, one man's truth may appear to be its total negation to another and yet neither may be guilty of deception.

Classic examples of such paradoxes are not difficult to find in the banking industry where brash self-interest and crass commerce make truth hardly recognisable in its pure form.

Take the case of a Dubai-based ship chandler who had a decent business and a smooth credit relationship with his bank until about three years ago when suddenly things turned upside down and the bank pulled the plug on him.

It happened in the wake of the notorious Madhav Patel defrauding the local banking system of more than a billion dirhams, which cast a long shadow on the banks, leading to a knee-jerk reaction from them; the order of the day was to cut down any doubtful exposure.

The ship chandler had a credit facility of Dh14 million with his bank, which was overnight reduced by more than half to Dh6 million.

Unfortunately, a number of cheques that he had issued to business associates bounced as there was suddenly a mismatch in the money that could be drawn down against the bank facility.

The aggrieved parties enforced the law and the businessman was promptly behind bars where he had to spend the next two years or so. As if to rub salt in the wound, his warehouses were plundered and ultimately the business was ruined. All this for no real fault of his: a travesty of truth as far as he is concerned.

As for the bank, however, the truth seemed to be entirely different. Any loan was a loan that could turn bad, particularly when it involved a member of the business community that, despite a very sanguine track record, also included a handful of the likes of Madhav Patel.

Incidentally, Patel had an impeccable record with the banks and enjoyed their full confidence for several years before he revealed his true colours to them, by which time it was too late. So, the bank in question may be deemed to have acted in good faith to protect its own interests when it cut the exposure to the ship chandler.

Yet, the ultimate truth is that truth had been negated, which raises questions of propriety and accountability.

Who will account for the untold miseries that had been heaped on the businessman and his family? Who is responsible for the collapse of his business? Don't banks have a responsibility towards their borrowers? How can they rock the boat in the middle, risking the recovery of their own money?

These questions were put to a leading light of the local banking industry, whose bank also had an exposure to Patel's wickedness and his response was hardly at variance: the ship chandler deserved to be given sufficient notice and time to organise payments for the cheques he had issued.

Banks generally do not act in this manner, he stressed. If a bank wants to get out of a risky business, or relationship, it does that over a period of time. Only in extreme cases do they get out in summary fashion, which means booking a loss, he pointed out. And when that happens the comfort level with a borrower would have reached the zero mark.

According to him, the case of the ship chandler could be a mistake or an error in judgment on the part of the bank officials.

That still leaves a question out in the middle: is there no recourse to remedy available to the victims of such mistakes, even if such mistakes are few and far between?

In the U.S., there are a number of instances where banks have been penalised heavily for asking borrowers to pay up when they were apparently not in a position to do so due to unforeseen developments. The ship chandler appears to have a much stronger case.

Current approaches to defaults, cheques etc. certainly merit a look back. A recent landmark ruling by the local courts striking down the freezing of accounts by a bank that offered loans without properly securing them as also calls by the Federal National Council against sustaining claims of banks which lend money to those who do not have the capacity to pay back form an ideal backdrop to such a review. For the issue certainly involves more than rhetoric on truth.