Most of the expats when they land in the UAE dream of owning a big house, a car and a business that can support them for the rest of their lives in their home countries. Many of them - with an average middle class income - opt for loans which they remit to meet their financial objectives.
Out of over eight million expats in the UAE, there are approximately 2.8 million Non-Resident Indians (NRIs) , accounting for the largest expat community in the country. NRIs remitted Dh14.64 billion, or around 35.9 per cent of the total value of the UAE remittances, during the second quarter of the year which saw total remittances reaching Dh40.8 billion.
Apart from the easy availability of loans in the UAE, one of the key advantages is that the interest rates in the UAE are lower than those offered by banks in India. Considering the impact of multiple factors - including currency fluctuation - the question that arises is that how beneficial it is for the NRIs to opt for loan in the UAE and invest in India. Despite low-cost and easier borrowing in the UAE as compared to India, analysts are of the view that it's easier said than done.
Vijay Valecha, chief market analyst at Century Financial, says when taken in the context of reducing interest rates, personal loans in India have interest rates in the range of 16 to 18 per cent while in UAE it varies from 5 to 6 per cent.
"Personal loans in UAE are clearly much cheaper when compared to India. Financially, it makes a lot of sense to take a loan in UAE rather than in India. A loan in the UAE in dollar terms means there is no currency risk for taking loans over here. On the other hand, loans taken in India lead to continuous hedging of the position and currency conversion charges," he said.
According to Valecha, NRIs can benefit from higher loan value and enjoy higher exchange rate benefits when they opt for loan in the UAE and transfer it to India. For NRIs who want loans for usage in the UAE itself it would be better to opt for loans in the UAE as they get better interest rates and do not need to incur any currency conversion charges as well.
Anita Yadav, head of fixed income research at Emirates NBD, noted that the clear advantage is the ease of borrowing and lower interest rates here. But it's not as easy as it reads.
"In theory, borrowing in the UAE at lower interest rates and investing in India in higher yielding assets would make sense. However, in practice this is not so easy. Unsecured borrowing or personal loans are generally not cheap and secured borrowing needs collateral security to be offered. It is difficult to offer assets based in India as security here."
She added: "Currency fluctuation is a major risk, too. Investors may make money on higher yielding assets in India but may lose if rupee depreciates against dirham. Another factor to remember is the taxes in India. While gross return may be high, total return net of taxes may not be high enough to justifying borrowing in the UAE and investing in India."
The Kuwait-based investment bank Markaz said in a statement that higher rate of returns from bank deposits in India compared to the UAE, along with the lower rate of borrowings offered by UAE banks might seem to be a lucrative option on paper for NRIs to borrow funds from the UAE and invest in India. But in reality, currency risk comes into play as exchange rate fluctuation could potentially offset any gains achieved due to the variation in interest rates.
"In short, there is no free lunch offered by the potential differences in interest rates among UAE and India," said the statement.
"The success rate of NRIs getting loan requests approved is higher in Indian banks compared to UAE banks as the eligibility requirements are more stringent for expats compared to nationals. The rate of interest offered by Indian banks is generally higher for NRIs when compared to local residents, presenting a less compelling case to borrow from Indian banks as an NRI. Some Indian banks also have restrictions such as having a mandatory resident co-applicant or a collateral while applying for a loan," Markaz noted.
According to Usman Riaz, Senior Investment Advisor, Leo Capital Advisors, interest rates on personal loans are lower in UAE, hover around 5-6 per cent while in India, the range is around 12-18 per cent. While interest rates on mortgage loans are lower in UAE, ranging between 3.75 to 6 per cent - reducing rates - while fixed is even lower ranging around 2-3.5 per cent. As far as India is concerned, the range is around 9-12 per cent. Riaz, also, cautions NRIs against rupee appreciation while borrowing from the UAE and investing in India.
"The advantages for opting a loan in UAE is lower interest cost, lower processing fee and swift process. On the flip side, the cons are high penalty on missing any payment in terms of higher cost as well as litigation in addition to seizure of the property. One cannot travel out of the country, if he has defaulted a payment and may face prison. The pros for opting a loan in India is approval of loan becomes easier to obtain being a domestic market, with referrals and in lieu of the immoveable property. On the other hand, the disadvantages are high interest cost, delay in approval of the loan - due to slow process or verification," he added.