UAE banks challenged by rising interest rates to collect overdue loans

Dubai: A sharp rise in interest rates, changes to rules on defaulted checks in the United Arab Emirates and IFRS-9 accounting rules on the early recognition of expected credit losses are making it difficult to recover defaulted loans, in particular among non-resident Indians who fled the countryside.

A large portion of defaults come from Indian borrowers who defaulted on their loan in the UAE and fled the country between 2015 and 2021. According to banking industry sources, defaulting Indian borrowers owe more than $25 billion. dirhams to UAE-based banks and many fled the country.

Due to the growth caused by the pandemic, banks are discovering that new check rules, accounting standards and rising interest rates will make it harder for banks to collect their loans.

New control rules

The new law in the United Arab Emirates on the decriminalization of bad checks which came into force on January 2 this year will become a major obstacle for banks to legally prosecute defaulters who have fled the country.

Most defaulted business loans by small and medium enterprises (SMEs) are either unsecured or partially secured with inadequate collateral. Most of these loans were secured by post-dated cheques.

“Under the previous law, NSF checks were treated as a criminal offense in the UAE and banks had the ability to take criminal action against defaulters in both countries,” said the head of the legal department of UAE. a local bank. “Civil cases are extremely expensive and take a long time to obtain judgment in India.”

Although new amendments to the Commercial Transactions Act come with stiff administrative penalties for issuing checks without sufficient funds, lawyers and bankers say that when defaulters are not in the country, civil proceedings here are unnecessary.

Obstacles to collection agents

Debt collectors appointed by UAE banks in India find it very difficult. Many defaulters who were hiding or living at different addresses in India have returned to their hometowns. Debt collectors say they can no longer use coercive tactics as they could get in legal trouble in India.

Our agents no longer use intimidation tactics or any form of coercion on defaulting debtors. Even talking to them about the importance of loan repayment has become difficult as many of them have hired lawyers

– Jithin Raghav, manager of a debt collection agency

Debt collectors say it’s impossible to get police help for delinquent loans abroad without filing a criminal or civil case with a magistrate locally. Again, these cases fall under the bail category and could take several years to get a final decision from the courts.

The use of debt collectors has become illegal following a court decision. In 2019, a divisional bench of the Kerala High Court ruled that foreign banks or financial institutions cannot hire debt collectors to collect the delinquent loan amount from a borrower in India.

Chamber of Justices K. Vinod Chandran and Justice VG Arun observed that if failure to repay by the borrower was a criminal offense in a foreign country, the bank could take criminal action against the borrower by diplomatic channel.

The court made the submissions while disposing of a petition for writ filed by a woman from Kollam, Kerala, who had returned after working as a nurse in Saudi Arabia against attempts by the debt collector of Al-Rajhi Bank , in Saudi Arabia, to intimidate and coerce her. pay the overdue amount.

Defaulters take over

The UAE has been following IFRS-9 reporting standards for accounting for bad debt since January 1, 2018. These accounting standards require banks to make provisions against expected credit losses.

Bankers say the rule gives borrowers an unfair advantage and extra bargaining power.

“Once defaulting borrowers know their loans have been found to be impaired, they or their lawyers enter negotiations to settle the loans at just 25% of the outstanding amount,” the group CEO of a bank said. local. Gulf News. “That, along with the now decriminalized check rules, has weakened banks’ ability to collect bad loans.”

Impact of higher rates

A rapid rise in interest rates in the United Arab Emirates is expected to significantly increase the debt burden of defaulting borrowers. The Central Bank of the United Arab Emirates raised interest rates by a quarter of a percent earlier this month. Global interest rates are expected to rise by 1-1.5% this year.

Lawyers say the increase in the total debt burden will become a deterrent even to those who were considering some form of loan settlement.

We often advise our foreign bank customers to be prepared to pay a reasonable amount with a convenient repayment schedule. Our role has become more that of negotiators

– CV Nagaraj, a representative of a debt collection agency based in Pune

Legal gaps

Local banks’ legal departments, external lawyers in India and debt collectors say there is a lack of clarity on how to pursue lawsuits against defaulting debtors from foreign countries in India.

In early 2020, India and the UAE agreed to make the judgments of the UAE Courts on defaults enforceable in India. Although the deal remains on paper, not much has happened. It is clear that cost and time are two factors that have prevented banks from pursuing these cases in court in India.

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