UAE NRI investors in Indian stock market suffer losses – and that’s not the only worry
Dubai: NRI investors who have borrowed from UAE banks and invested in Indian stocks are facing heavy losses.
Their loan servicing fees in the UAE are expected to increase as interest rates rise and as foreign exchange losses increase with the weakening of the rupee. Recent selling pressures on Indian equities have led to a significant erosion in the value of NRI portfolios. Despite a general tightening of lending standards in the UAE during the pandemic, it was relatively easy for salaried professionals and small business owners to borrow in the UAE based on proof of income.
The lure of quick returns in Indian stock markets – and the frantic marketing of some brokers and money managers – prompted many to bet on Indian stocks last year, even as stock market valuations soared. In addition to personal loans, NRIs were offered loans on their fixed deposits in dirhams in local banks and NREs. [non-resident external] Rupee deposits in Indian banks.
A number of banks in the UAE have entered into partnership agreements with Indian banks to offer loans on NRE deposits in India and offer between 80-90% of the value at maturity of the fixed deposit in the form of loans in dirhams. Additionally, many have used credit card cash withdrawals or loans offered against credit card limits to invest in Indian stocks.
All about choice
Bankers said investing in the markets with borrowed funds was an individual choice. “We don’t impose conditions on the use of personal loans,” said a senior retail banking official. “In the case of working capital loans [given to business] it is also difficult to verify the end use. If borrowers use these funds for other investments, the risk is entirely theirs.
Most NRI investors, even those with little knowledge of stock markets, were sucked into the market frenzy when key indices surged after the initial shock of the pandemic.
“Until mid-January, everything looked perfect,” said Rakesh Gajra, portfolio manager and investment consultant. “Rising inflation, gaps in macroeconomic data, the conflict in Ukraine and rising global interest rates have led to increased volatility. We expect conditions to remain choppy over the next six months. coming months.”
The BSE Sensex had hit a low of 27,590 on April 3, 2020 – and peaked at 61,223 on January 14, 2022. The market has been on a rollercoaster ride ever since, wiping out billions in market capitalization. (Despite recent fluctuations, over a five-year horizon, the Sensex has gained 94%.) A perfect storm?
Turbulence in Indian markets is likely to be prolonged by several internal and external factors affecting the economy.
A rise in global interest rates led to a substantial withdrawal of foreign institutional investors (FIIs) from Indian markets, withdrawing 410 billion rupees in March ahead of rate hikes by the US Federal Reserve. FII flows (as a percentage of market cap) are now at decade lows, according to a recent report from HSBC.
“A protracted conflict may still trigger further selling – we estimate around $7-8 billion outflows in such a scenario, similar to levels seen during the global financial crisis,” the bank said. “Tightening global liquidity and inflation also remain overriding concerns.”
UAE banks are isolated
UAE banks that have provided loans are protected against potential defaults, as these were granted after proper assessment of credit ratings and leverage ratios. “These loans are not leveraged for stock purchases,” one banker said. “Personal loans are granted based solely on the borrowers’ credit score and earning capacity over the credit period.”
“Loans against term deposits [in India or UAE] are fully collateralized and margin calls are not required as loan values are significantly lower than fixed deposits held as collateral.
For NRI investors who have bought Indian stocks with foreign currency borrowing, the risks are manifold. As stock valuations decline, their debt-to-equity value ratio will rise sharply. As rising interest rates add another layer to the burden of gross debt, the real value of their portfolios declines as inflation bites.
NRIs also face currency risk on their borrowed funds, with the Indian rupee facing steep depreciation.
Liquidity tightening in the United States
“The real concern would be in the middle of this year when the Fed announces its quantitative tightening (QT) plan,” said Arvind Chari, CIO, Quantum Advisors. “If the Fed plans to sell Treasury bonds to reduce its balance sheet, it will push up US bond yields and may cause uncertainty in financial markets.”