Dubai: The COVID-19 outbreak in India in two waves since March 2020 has been an unlikely bailout for many Indian expatriates who owe millions in outstanding loans to UAE banks and fled the country between 2015 and 2020.
In early 2020, India and the UAE agreed that the UAE court’s loan defaults would be enforceable in India, making life difficult for Indians who defaulted on their loans and fled the country.
After the change in the legal status of such cases, many banks in the UAE hired law firms to initiate litigation in India in order to recover their money from defaulters. Bankers and law firms are now saying that nothing much has progressed due to the COVID outbreak in India and the UAE since March 2020.
“It is clear that the pandemic has changed the priorities of banks. Since the first quarter of last year, banks have paid more attention to new loan impairments associated with the impact of COVID, and historical defaults have been relegated to the background, ”said the head of the legal department of a leading local bank.
Judicial cooperation of India with the UAE
To facilitate mutual assistance in civil and commercial matters, India and the UAE signed on October 25 the “Agreement on Legal and Judicial Cooperation in Civil and Commercial Matters Regarding the Serving of Summons, Court Documents, Commissions, Enforcement of Judgments and Arbitral Awards.” , 1999 (Treaty).
Although the Treaty was ratified in 2000 and the UAE implemented it by publishing it in its Federal Gazette that same year, India did not comply with internal formalities regarding some of the Treaty’s provisions until early 2020.
As a result, the parties that won litigation in the UAE were unable to benefit from the provisions of the Treaty and often faced difficulties in enforcing judgments in India. On January 17, 2020, India issued a notice declaring the UAE a “reciprocal territory”. The 2020 declaration means that, in theory, it should now be much easier and faster to enforce the decisions of the UAE courts in India.
UAE banks faced massive loan defaults between 2015 and 2017 following the payments crisis that began in the small and medium-sized enterprise (SME) segment.
Loan delays were largely caused by a sudden break in the payment cycle in the economy. After a sharp drop in oil prices since 2013, a combination of fiscal adjustments ranging from rationalizing spending by government-related entities and leading corporations has resulted in delays in payments to SMEs. This led to the first round of loan defaults by a number of SMEs.
In the absence of viable insolvency procedures, business owners who faced legal action and potential criminal prosecution from creditors chose to skip and return to their home countries.
Loan defaults have had a domino effect on banks’ credit quality, as business failures and job losses increased the total volume of problem loans (NPLs).
The bankers said the total loan defaults in the SME and retail segments ranged from AED 30 billion to AED 35 billion, of which AED 25 billion is owed to NRI borrowers.
Retail loans, including small business loans, account for only about 20 percent of the total default, while more than 75 percent are for relatively large business loans ranging from AED 20 million to AED 150 million.
UAE banks were eager to pursue large defaulters with liabilities exceeding AED 2 million through legal channels, while they were more inclined to pursue smaller defaulters through collection agents in India. However, both channels have largely ceased to function over the past year as the pandemic slowed or halted the trial.
In the case of using loan collection agents, banks face great resistance from local law enforcement agencies and courts. The use of collection agents became illegal after a court ruling. In 2019, the Judicial Panel of the Kerala High Court ruled that foreign banks or financial institutions cannot engage collection agents to dispose of an outstanding loan from a borrower in the country.
The Judicial Panel K. Vinod Chandran and Judge V. G. Arun noted that if the borrower fails to pay the amounts as a criminal offense in a foreign country, the bank can initiate a criminal case against the borrower through diplomatic channels.
The court made these observations in a lawsuit filed by a woman from Kollam, Kerala, who returned from working as a nurse in Saudi Arabia, against the attempts of the collection agent of Al Rajah Bank, Saudi Arabia, to intimidate her and force her to pay the outstanding amount.
Banks for doing business
Banks in the UAE contacted by Gulf News said they will continue to explore all legal options in India to recover their contributions from defaulters. “Our priority will be the pursuit of large defaulters who owe us millions. Many cases are active and as soon as the COVID situation improves, these cases will be resumed in both the UAE and India, ”said the head of the small and medium business department of the UAE Bank.
Although the Kerala High Court has banned the use of collection agents to track and collect outstanding retail and credit card debt, banks have plans to appeal the decision to the Indian Supreme Court.