Dubai’s relentless pursuit of growth received an unprecedented jolt last week, when its heavily indebted flagship holding company, Dubai World, announced plans to restructure $60 billion worth of loans. Dubai World’s real estate arm Nakheel is in the doldrums, after a 50% drop in real estate prices has forced it to ask for a trading suspension of its Islamic bonds (sukuks). Dubai World has sought a moratorium on its debt obligations for a period of six months.
It also appears now that big brother Abu Dhabi is not in a hurry to come to the rescue of its more illustrious neighbour, and is willing to aid some entities only on a case-to-case basis. That could put some Indian banks with direct or indirect exposure to the ‘investors’ paradise’ in a spot of bother.
Although it is unlikely that this crisis will escalate into a full-blown sovereign default, Indian entities will be wary of taking a hit on their balance sheets. A $5.5-billion syndicated loan to Dubai World has, among others, two leading Indian banks as participants. Bank of Baroda and State Bank of India (SBI) have an exposure to the embattled entity, although it is unlikely for each bank to have a significant exposure, given the high number of participants. Some other Asian banks on the roster include Bank of East Asia, CITIC Ka Wah Bank, Cathay United Bank and United Overseas Bank, among others.
In fact, Bank of Baroda has an exposure of Rs4,000 crore to Dubai, of which Rs900 crore is to Dubai World. However, the first repayment in respect of this advance is due only in 2011. On the other hand, India’s largest lender, SBI, has an exposure to Dubai World to the tune of $50 million (Rs230 crore).
Both the banks have, however, played down concerns regarding repayment. Bank of Baroda’s chairman and managing director MD Mallya has stated that the company would study the implications of restructuring Dubai World’s loan. Although the money involved is not huge enough to raise concerns, the management of these banks will be forced to inspect their balance sheets and take a closer look at the beneficiaries of the advances. Among other banks, Axis Bank, ICICI Bank and Indian Overseas Bank are reported to have exposure to Dubai, albeit in manageable proportions.
Apart from the direct exposure to Dubai World, banks will have to study their indirect exposure through loans to companies and exporters that deal with Dubai-based entities. –Sanket Dhanorkar[email protected]