Debt collecting agencies look to cash in on bad assets going cheap

Several debt collecting agents in the UAE claim they have received enquiries from leading banks, credit card companies and automobile leasing companies to sell their bad assets at considerable discounts so that they can show a healthy balance sheet by the beginning of next year.

Leading debt collectors in Dubai and Sharjah told Emirates Business that their workload had gone up substantially in the past two months. Some banks are negotiating with them to sell their bad debts at steep discounts, they said.

Foreign banks normally pay 40 to 45 per cent commission on recovered debt from overseas clients and selling such bad debts at a steep discount is a viable option to improve liquidity, industry sources said. Bankers, however, said they were not aware of any such plans, though some of them do use the service of debt collectors.

On the other hand, many debt-collecting agencies said they had already received offers from banks and were considering buying the bad debts that they had been offered at "nominal" rates.

Ali Barqawi, General Manager, Mustaqbal Debt Collection, Sharjah, said: "Many big banks and credit card companies, and even some traders, are inquiring to sell their bad assets to reputed and legally operating debt collection agents. I am considering offers for bad personal loans and credit card dues, which some banks are seeking to sell at nominal values.

"It is possible that a bad loan worth Dh1 will be sold for as low as one or two fils, which amounts to one or two per cent. Given the huge cost and legal work involved in recovering bad loans and defaulted payments, some banks and credit card companies are keen for amicable settlements with their customers who cannot repay their loans due to sudden job losses and the current deterioration of the credit scenario."

However, when Emirates Business contacted Lloyds TSB, among other banks, its Managing Director, Bert De Ruiter, said his bank is not currently facing any problem of bad debts. "We do not have any bad debts problems so it is not prudent to make a comment on the topic," he said.

Graham Honeybill, General Manager, National Bank of Ras Al Khaimah, said he is not aware of any plans by banks to sell their bad debts.

"I have not heard about such a plan. I suppose some banks may be using the services of debt collectors but our bank has its own internal debt collection department."

Insisting that his company had been approached by the banks, Barqawi, himself a former banker with Mashreq, said in the normal course of loan recovery for banks or credit card companies, the payment to the debt collectors depends on time-bound recovery schemes, from 90 days to six months.

"We get 10 per cent commission if the amount is recovered within 90 days, 20 per cent for recovery from 90 days to 12 months, 30 per cent for 12 months to less than 18 months and 40 per cent if the recovery period exceeds 18 months," he said.

In addition, all expenses incurred outside the UAE as part of the recovery effort, like air tickets, international telephone calls, payment for foreign representatives and lawyers, is to be borne by the banks or creditors.

"Given the huge expenses involved in recovering bad loans, especially if the customer has absconded from the UAE, in this time of drying liquidity banks and creditors are keen to sell such bad loans to debt collectors and get whatever liquidity they can to improve their situation before March 31," said Barqawi.

He said in the current scenario, even if banks do not sell off their bad debt to debt collectors, they would still increase their dependence on them. As part of cost reduction measures, banks are getting rid of their own recovery staff and opting more and more for the services of debt collectors.

There is another way banks stand to gain in their balance sheets if they opt to sell off their bad debt to debt collectors – by claiming the credit insurance value on it first, on top of the small profit they would make though the sale of the bad debt.

Anil Berry, Regional General Manager for the GCC at Eurler Hermes Credit Insurance, the leading credit insurance firm in the world, said banks, credit card companies or other clients that take credit insurance can only make a claim on defaulted credit after proving that they were unable to recover the amount through all legal procedures at their disposal. In the case of clear insolvencies like the collapse of the Lehman Brothers, the credit insurer pays the insurance claim outright after following the normal procedures.

"In most credit default claims in the UAE, the debtors cannot be traced because they pack up and disappear from the country. The credit insurance company has to get clear evidence of a deliberate default to respect the claims. Banks appoint debt collection agents and follow the normal recovery procedures before making the claim," said Berry. "If it is small amounts we pay the insurance claim to the bank or other creditors after a physical verification of the debtors' property. If the amount is above $100,000, we take our own legal action against the defaulter."

Calum D McClure, Managing Partner at Decol Debt Collectors Services, said: "All over the world people are defaulting left, right and centre, and our workload has gone up substantially. In the UAE, individuals are defaulting loan payments, companies are delaying payments and housing loan repayments are also delayed. We represent 23 international banks, especially US and European ones, which have branches and clients all over the world."

The company's list of international clients include leading multinational banks such as Standard Chartered, HSBC, Lloyds TSB, American Express Bank, Barclays and African Bank, to name a few. It follows a "no recovery no fee" policy but charges 40 per cent of the collected amount as commission for all overseas cases from its members and 45 per cent from non-members.


How selling bad debt works

Before the year-end, banks have to make provisions for bad loans.

After they have obtained the principal from credit insurers, whatever money they can generate by selling the bad assets to debt collector is an additional income flow for banks in distress.

Debt collectors with long-term business relationships with a bank can get short-term credit for 90 to 180 days to buy the bad loans. Once the bad loans are written off and the accounts are closed, banks are obliged to keep the details in a separate Memorandum Account for 15 years.

The debt collectors who buy the bad loans then go about recovering the amount, most of which they can keep after paying off the nominal charges at which the bank sold it to them, creating a win-win situation for both bank and debt collector.

Even though the nominal value of bad assets is small, the total sales may run into several million dirhams.

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