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NRIs: Should I take loan in India or the UAE? Finding the more cost effective option of the two Image Credit: Bloomberg

Dubai: One of the question that often arises for Indian expats in the UAE is how beneficial it is for the NRIs to opt for a loan in the UAE and invest in India, as opposed to taking a loan in India.

Apart from the comparatively easier access to loans in the UAE, one of the key advantages is that the interest rates in the UAE are lower than those offered by banks in India.

Despite low-cost and easier borrowing in the UAE as compared to India, even after considering the impact of multiple factors, including currency fluctuation, analysts are of the view that it's easier said than done.

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Easier said than done?

Experts note that the clear advantage is the ease of borrowing and lower interest rates in the country. But it's not as easy as it reads.

In theory, borrowing in the UAE at lower interest rates and investing in India in higher yielding assets would make sense. However, in practise this is not so easy.

Unsecured borrowing or personal loans are generally not cheap and secured borrowing needs collateral security to be offered. Experts also opine that it is difficult to offer assets based in India as security here.

Currency fluctuation is a major risk, too. Investors may make money on higher yielding assets in India but may lose if the Indian Rupee depreciates against the UAE dirham.

Another factor to remember is the taxes in India. While gross return may be high, total return net of taxes may not be high enough to justifying borrowing in the UAE and investing in India.

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Why I should opt for a personal loan in the UAE as opposed to India
When taken in the context of reducing interest rates, personal loans in India have interest rates in the range of 14 to 18 per cent while in UAE it varies from 4 to 6 per cent.

Personal loans in UAE are clearly much cheaper when compared to India and financially, it makes sense to take a loan in UAE rather than in India. But why?

Because a loan in UAE dirhams, which is pegged to the US dollar, means there is no currency risk for taking loans in the country in dollar terms. Whereas a loan taken in India leads to continuous hedging of the position and currency conversion charges. This is why it is cheaper to take a loan in the UAE.

How to determine the answer based on interest or profit rates

Taking a loan from your UAE bank for a financial need in your home country can be beneficial because of the lower Sharia-compliant profit rates.

However, as a note, Sharia-compliant financing need not be always cheap. In most cases, the difference might be only in nomenclature. Profit rate or interest rate, finally what matters is the cost of funds.

For example, for non-resident Indians, interest rates on personal loans taken in India can be as high as 15 per cent, averaging around 10 to 11 per cent per year. In the Philippines, an Overseas Filipino Worker (OFW) i.e. an expat may have to pay as much as 25 per cent or more as interest per year. This is in addition to a common requirement of having a direct relative based in Philippines as co-borrower for the loan.

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In the UAE, per annum profit rates are lower and more reasonable owing to the Sharia laws that govern financial operations in the country, including banking and lending. You could get an unsecured loan for a fixed interest rate of 5 per cent or lower in the UAE.

A fixed rate of 5 per cent works to 9.25 per cent on reducing balance basis. Even then the nominal rates are lower compared to emerging markets like in India and the Philippines where currencies tend to depreciate due to weak economic fundamentals.

In the UAE, the currency is pegged to the dollar and is backed by strong external balances and current account surpluses. What a borrower in dirham should keep in mind is that, he or she has sufficient future income in dirham or any other strong currency to repay the loan.

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What to know? Understand real interest rates, nominal interest rates and inflation

In the absence of that, the borrower is taking on himself two types of risks, such as the currency risk and interest rate risk. Currency risk kicks in when his domestic currency weakens and the debt burden becomes big in terms of domestic currency.

Interest rate risk can be very real if the countries are going through a rate hike cycle. Dirham’s rates are directly linked to US central bank rates and interbank rates. When these rates go up, the rates offered by local banks go up too. These movements always need not be proportional.

The local rates are a function of factors such as cost of funds to local banks, overall liquidity in the system and the loan demand.

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So, coming back to our point of economics of borrowing here to pay for an asset in India will depend on factors such as interest rate outlook for the loan period, currency outlook, the potential appreciation of the asset and the inflation outlook. And more than everything, one’s ability to earn in a hard currency during the loan tenure.

The concept of real interest rates, nominal interest rates and inflation should be understood before one takes a hard currency loan to finance an asset or make an investment in a country that is susceptible to exchange rates volatility.

So, in other words, a quick and easy loan need not be always cheap and viable. It all depends on a number of factors as explained above.

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How do I factor in exchange rates benefits?

NRIs can benefit from higher loan value and enjoy higher exchange rate benefits when they opt for loan in the UAE and transfer it to India.

For NRIs who want loans for usage in the UAE itself it would be better to opt for loans in the UAE as they get better interest rates and do not need to incur any currency conversion charges as well.

Higher rate of returns from bank deposits in India compared to the UAE, along with the lower rate of borrowings offered by UAE banks might seem to be a lucrative option on paper for NRIs to borrow funds from the UAE and invest in India.

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But in reality, currency risk comes into play as exchange rate fluctuation could potentially offset any gains achieved due to the variation in interest rates.

Financial consultants also add that the success rate of NRIs getting loan requests approved is higher in Indian banks compared to UAE banks as the eligibility requirements are more stringent for expats compared to nationals.

The rate of interest offered by Indian banks is generally higher for NRIs when compared to local residents, presenting a less compelling case to borrow from Indian banks as an NRI. Some Indian banks also have restrictions such as having a mandatory resident co-applicant or a collateral while applying for a loan.

While interest rates on mortgage loans are lower in UAE, ranging between 3.75 to 6 per cent - reducing rates - while fixed is even lower ranging around 2-3.5 per cent. As far as India is concerned, the range is around 9-12 per cent.

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Experts caution NRIs against rupee appreciation while borrowing from the UAE and investing in India

The advantages for opting a loan in UAE is lower interest cost, lower processing fee and a swifter processing. On the flip side, the cons are high penalty on missing any payment in terms of higher cost as well as litigation in addition to seizure of the property. One cannot travel out of the country, if he has defaulted a payment and may face prison.

The pros for opting a loan in India is approval of loan becomes easier to obtain being a domestic market, with referrals and in lieu of the immoveable property. On the other hand, the disadvantages are high interest cost, delay in approval of the loan - due to slow process or verification.

Verdict: Take your decision based on the amount of money you need

If it is a property loan, you may be better off availing a loan as your property is based in India. But if you are able to meet your current need by taking a personal loan in the country, you might as well apply for one in the UAE, after factoring in the forex costs, as you plan on sending the money back home.

But how much loan can you get, if you decide to go for the latter option? According to the UAE Central Bank regulations, banks cannot offer a personal loan in excess of 20 times an individual’s monthly salary. So, if you earn Dh10,000 a month, the maximum personal loan you would qualify for is Dh200,000.

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But that’s not all. The maximum personal loan amount you can apply for is also subject to your Debt Burden Ratio (DBR). The UAE Central Bank has mandated that a UAE resident cannot have a DBR of more than 50 per cent. (link to DBR story)

What that means is the combined monthly instalments on your existing loans should not exceed 50 percent of your monthly income. So, if you earn an income of Dh10,000 a month, you must not be repaying more than Dh5,000 towards monthly debt instalments.

In theory the loan with the lowest interest rate is cheaper in the long run. Most home loans are cheaper per month due to their longer period (typically 15 to 25 years) whereas you are expected to pay off a personal loan within 5 to 6 years.

What’s better for you depends on the cost of the property, funding required, how much money you can spare per month towards your mortgage, and this will help determine which one is better in your case.

In theory the loan with the lowest interest rate is cheaper in the long run.

However, let’s consider a few assumptions and compare the two scenarios with an illustration.

Here’s an illustration to help you make your decision:

Let’s say UAE-based Indian expat Mr. X wants to buy a property in India. The cost of the property is INR5 million (Dh246,380). Mr. X needs funding for about INR4 million (Dh197,104).

Mr. X is financially comfortable to spare about $1,100 (INR81,992 Dh4,040) per month after factoring in his other debt and financial commitments. But the whole idea of paying up more in interest and how that is going to affect his savings makes him worried.

Mr. X is speaking to an India-based Bank for a 10 year term loan and 9.9 per cent interest rate, and a Dubai Bank of 4 year term period of 6 per cent interest rate. Let’s assume Mr. X is eligible to get INR1.88 million (Dh92,639) personal loan in Dubai. Here’s one way Mr. X can go about it:

In 2021, Mr. X should finance INR2.2 million (Dh108,407) from the Indian bank for 15 years at 9.9 per cent. Mr. X will have to pay INR23,506 (Dh1,158) per month for this loan.

Mr. X should opt for the INR1.88 million (Dh92,639) personal loan for 4 years at 6 per cent. This will cost Mr. X INR42,273 (Dh2,083) per month, totalling to Mr. X paying INR66,000 (Dh3,252) per month for the 4 years from 2021 through 2025.

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In 2025, Mr. X’s personal loan in Dubai would have paid off, and the balance on your Indian home loan will have reduced from INR2.2 million (Dh108,407) to INR1.9 million (Dh93,624).

Now that your Dubai personal loan is finished, you can apply for another personal loan in Dubai for INR 1.9 million (Dh93,624) which you will use to foreclose your home loan in India.

This loan should be taken for 2 years and 6 months. Your monthly payment will be INR67,860 (Dh3,343) assuming you can still get the loan for 6 per cent.

After 6.5 years you would have repaid all of your INR4 million (Dh197,104) debt and would have paid INR1.19 million (Dh5,863) in interest at an average payment INR66,500 (Dh3,276) a month.