UAE debtors on the tough road to solvency

Vin Nair calls himself a survivor.

Having accumulated deep debts, he paid off what he could and struck a deal with the bank to restructure the rest when he could no longer keep up with the repayments.

That should have been the end of the story, but it wasn’t. There was another problem. The deal left him struggling financially, and with no access to credit, he felt he had no choice but to turn to a loan shark for money to get by.

“I have managed to pick up the pieces to a large extent but one of the key issues I’ve faced along the way is banks’ inability to work with me to handle my considerations while I talk about my case,” says Mr Nair, 43, from India.

“I am sure that there are a lot of people out there who face challenges, similar or worse than mine, and are faced with no choice but to go to the money lending sharks who basically take away your life charging in excess of 15 per cent interest per month on any amount borrowed. There’s almost no comeback from that,” he says.

Mr Nair’s situation is not unique. For those UAE residents that have made the commitment to honour and repay their debts, the road to solvency is far from easy.

A few years ago, he could have plugged the hole by taking out yet another loan from a different bank. He would just have had to conceal how much debt he already had. But the launch of the Al Etihad Credit Bureau in 2014 changed that as it keeps an official record of all borrowers’ credit obligations in the country.

This week the credit bureau told The National that those with unfavourable financial histories will have their "default information" listed on their credit report for five years.

In theory this means that debtors wanting to borrow again in the future, should aim to keep their record clean for five years before the banks will potentially consider lending to them. However, Philip King, the head of retail banking for the UAE at ADIB, and a member of The National's debt panel, says it is not so clear cut.

“Evaluation of individuals is done at the level of the Credit Bureau, as it has the complete information on each person’s credit history, but the bureau is not responsible for decisions on extending finance to individuals,” says Mr King.

“Banks can take the information provided by the credit bur­eau and determine how to treat the customer. This includes the option of withholding new fin­ancing from individuals with poor credit performance.”

Rasheda Khatun Khan, a wealth and wellness planner, founder of Design Your Life and a member of The National's debt panel, says it is not ideal that residents with a bad credit history are barred from further borrowing, but there has to be a balance.

“If someone gets into debt and they know the solution is that they get blacklisted and then just take another debt, it doesn’t help the person at all. In fact, you are harming them,” she says. “It should be under discretion basis and it shouldn’t be, for example, that you are blacklisted and that’s it.”

Mr Nair’s troubles started after a media business he set up failed, leaving him with Dh1 million in liabilities at the end of 2010. “It was a scary time. I had never experienced anything of that magnitude,” he says.

He paid off about Dh380,000 of the debt by selling property in India and got a job as a chief marketing officer, a role he did for three years travelling 14 to 16 days a month before leaving after he “burnt out”. By June 2014 he was without a regular job but still had consulting roles to keep him going. He started to struggle to pay for his commitments and needed more credit.

“I tried every single bank in the UAE at that point to find a way to get a bank to give me a loan based on my income from various consulting assignments which didn’t work out,” he says.

So he turned to a private money lender, borrowing Dh40,000 to “take care of a few things”. But within about three months the debt had mushroomed to Dh90,000 owing to the high rate of interest – equivalent to 180 per cent a year. In April 2015, he secured a job as vice president for sales and marketing at a trading company, which he is still doing today. But he soon found himself struggling to pay the debts back.

“I was able to continue paying the structured and the unstructured debt but by the September it was a bit too much to handle because I was living in Jumeirah Lakes Towers. I had my daughter and my wife living with me. I had my commitments to fulfil. Then after I finally told the bank let’s do this restructuring, they said fair enough, but it means that you can’t get any kind of funding.” But because Mr Nair is on such a strict financial diet, he has little leeway when things go wrong.

“I have situations where my health is not OK. Or for example when my mum has to travel for an emergency or my daughter needs something for an emergency. I can’t fund that because I don’t have a credit card or loan, so I go to a friend of mine and say, ‘hey, can I borrow about Dh2,000? I will repay it next month’. That’s a sickening situation, especially if you have been at a very senior level. At any level, for that matter.”

However, Mr Nair does welcome the news that the defaults will only remain on his credit record for five years.

“It is good to know that a genuine effort to fulfil commitments will be rewarded and my focus will be to ensure that I stay [the course] and fulfil those,” he adds.

Derek, who did not want to reveal his full name, is in a similar position to Mr Nair; he needs credit but cannot borrow because of poor UAE financial history. The Briton, a married father-of-two and resident here for seven years, bounced a Dh155,000 cheque guaranteeing a private loan for his former business partner. He was taken to court and found guilty.

“[My former business partner] basically convinced this lady to lend him the money,” says the 41-year-old. “I didn’t know about cheques and all these kinds of things so I signed a cheque, a stupid, stupid mistake. I will never do it again.”

When his former partner failed to pay the loan back, the woman who lent the money cashed Derek’s cheque. He ended up in prison briefly, before the case was changed from criminal to civil. “I got deeply depressed. I was a totally different person. I tried to get loans. I couldn’t get loans. You can’t get anything,” he says.

ADIB’s Mr King says a bank’s role is to create and preserve value for its customers and shareholders, so it should be responsible when taking decisions about who to offer financing to, and how much they should receive. “We have seen globally how over-extension of finance can put individuals and companies in trouble. The credit bureau is therefore a very positive development. Sometimes withholding financing from an individual is the right thing to do for that person, as well as for the bank,” he says.

“What an individual does while under review largely determines how they are treated afterwards. If the person continues to make regular repayments they should be able to improve their credit worthiness, proving to their bank that they have the capability to receive financing in the future,” adds Mr King.

In more mature markets such as the United Kingdom and the United States, credit ratings agencies and credit counselling firms provide guidance to people on how to improve their credit scores. And there are specific products available there for people with poor credit history, says Gaurav Bhalla, the founder and chief executive of debt advisory company Lotus Loans and Rescheduling Services.

Mr Bhalla says his former employer, American Express, offers such a product in India. The card, he says, has a low limit and is available to those with poor credit histories but have shown a willingness to pay off their liabilities in the past.

“There was a good portfolio which got generated by sourcing this specific product to these people because it looked at past trends, behaviour and there was a lot of analytics applied in launching this product,” he adds. While such a product is not currently available here, whe­ther it is eventually introduced depends on the risk appetite of the banks, says Mr Bhalla.

“This market is very different to the US and the UK. The first thing [a defaulter faces] here is a police case and an action being taken against them and they take the next flight and exit the country,” says Mr Bhalla. “That is one challenge the banks have and with the huge 70 per cent or 80 per cent expatriate population it becomes difficult for them to go aggressively with these aspects. They have to protect their interests at the end of the day.”

But many experts agree something needs to change to help debtors like Mr Nair and Derek who are paying off their liabilities. “The credit bureau is prevention. People cannot now get into that kind of debt but there is a huge number of people who are already stuck, regardless. There needs to be a solution for this pool of people,” says Ms Khatun Khan.

The only solution currently open to people with no access to credit, she says, is to become better at budgeting so their income goes further.

“It is simple maths. If you are spending more than what is coming in you are not going to get out of debt, you will just increase the debt,” says Ms Khatun Khan.

“Every month there is something. You need to budget that into your normal monthly expenses and create an emergency fund. This is the biggest issue for people; they feel that it’s not their fault because it is an unforeseen expense. The only thing that is unforeseen about it is the name of the expense.”

pf@thenational.ae

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