One UAE dirham fetched as much as INR19.70 ($0.27, £0.21) on September 23, after the Indian currency fell to a life time low of INR72.97 per dollar early this week.
The past two months saw a peculiar scenario when the rupee was touching record lows in unfailing frequencies expats flocked the exchanges. All good things have to come to an end and today they are left with minimum cash to cash in on the new nadir.
This is corroborated by Binu Nair, general manager personal finance, of Emirates NBD, one of the largest banks by assets in the UAE: “Though most NRIs have already remitted whatever they can, even by borrowing at high rates, there are still more expats want to exploit the situation.
“As the rupee is set to weaken further, remittances will increase and flow to various investments such as property, equities, mutual funds, bank deposits, other instruments and to a greater extent small savings.”
Adeeb Ahamed, chief executive of Lulu International Exchange, a prominent exchange house in the UAE, thinks the rupee might test 20 against the UAE currency unit “very soon”, hinting that the Indian currency will go down to INR73.4 against the greenback in tandem with rising crude oil prices, trade frictions and a widening fiscal deficit.
Biggest source of forex
The UAE has been the biggest source of remittances to India, accounting for 26.9% of the total remittances, with the south Indian state of Kerala receiving the maximum.
According to the central bank statistics, expat remittances from the UAE rose by 13.1% to $23.96bn for the first half of 2018, from $21.18bn for the corresponding period in 2017.
Tabulated separately, the first quarter of the year saw remittances rising 17.3% to $11.84bn over the comparable period last year.
Further increase was witnessed in the second quarter, when the remittances jumped 8.8% to $12.09bn from $11.08bn in the same period in 2017.
One interesting fact is that almost all remittances are routed through the legal channels such as money exchanges and banks, with a negligible portion using the illegal channel called the ‘hawala’.
Of the total $12.09bn remittances in the second quarter, $9.47bn saw its path to India through the money exchange houses and $2.61bn billion using the banking route. That means just $1m was sent through ‘hawala’.
And who has been remitting? NRIs are of four categories. The lowest strata consists of the blue collar workers and low-paid office staff.
More qualified and better placed form the next layer with a ‘decent’ salary that entitles them to sponsor their families and enjoy a ‘family life’ in the Gulf.
Above them are the high skilled and qualified professionals constituting the upper echelons of corporates and MNCs. The millionaire entrepreneurs and billionaires make up the top layer.
Beyond their means
The remittance levels are inversely proportional to the net worth and earnings of the expats. The workers remit almost all their income every month to their families back home, irrespective of the exchange rate.
The middle class spend their income for maintaining families in the host country and manage some savings to invest for the future or to acquire property.
The professionals are the ones with allocable surplus for savings and investments.
The pattern of NRI remittance is that most remit money to India for household expenses and servicing housing or vehicle loans back home.
Figures released by India’s central bank, the Reserve Bank of India, showed that 59.2% of remittances were meant for family maintenance, 20% for depositing in banks and 8.3% to invest in real estate, equity and other sectors and 12.6% for other purposes.
Then, how is that the money exchanges are bustling with business whenever the Indian currency weakens? Of course with lavish lending by banks irrespective of the customers’ paying capacity and creditworthiness, as the banks make their moolah mostly from retail and credit card businesses when corporate lending is minimal.
That’s a path to debt-trap for many in an uncertain economic and employment scenario.
KV Shamsudheen, chairman of Pravasi Bandhu Welfare Trust, an NRI non-profit advisory organisation, warns against expatriates’ practice to borrow to remit money.
“It’s fine if they have an arbitrage advantage. Usually they raise funds and remit by availing personal loan from banks at annual interest of 6-10%.
“Those who have already availed this facility, or not being eligible for personal loan (one needs to have a salary transfer account with the banks for that eligibility) will go for ‘quick cash’ from credit card providers at monthly interest rates of 3-4% which works out to annual interest of 36 to 48%.”
There is another gullible class of remitters who borrow from the Shylocks — they are plenty in the labour camps — at rates as exorbitant as 96 to 120% annually (at 8 to 10% monthly).
The catch comes when this remitted money is either squandered on unproductive assets or kept in bank fixed deposits that yield not more than 7-8% annually.
The cardinal rule is that one should not invest in any assets with borrowed money, unless assured of a return more than the cost of funds.
Things will come to such a pass when the borrowers default on their EMIs (equated monthly instalments), usually on losing their jobs or borrowing beyond their repayment capacity.
The banks will tighten their grip by getting them arrested by the police when the cheques are dishonoured.
“Cheque bouncing is a criminal offence in the UAE. One way out is to bring back the money to pay off the debt. In most cases, this is not the case and many debt-ridden expats abscond.
“That’s why they should invest in liquid assets, such as equities, mutual funds or other securities, but not in land and property. If not, they are treading to a debt-trap and misery,” said Shamsudheen who conducts regular awareness lectures among the workers for inculcating savings and investment habits.
And all this stemmed from the enthusiasm to remit as much as one can when their dirhams fetch the maximum rupees, unmindful of the grave consequences.