Big banks in the Middle East have a lot to worry about. The price of oil, on which the region thrives, has crashed. Lockdowns have badly impacted the earnings of local businesses. The closure of borders is hurting airlines and hotels. 

And on top of that, financiers have to deal with possible losses at the hands of two large borrowers involving once high-flying Indian businessmen - Bavaguthu Raghuram Shetty, or B R Shetty, and Gaurav Dhawan. 

UAE banks have lent billions of dollars to companies owned by two entrepreneurs who just a few months back commanded immense respect from bankers and government officials. 

The rise and fall of B R Shetty 

NMC Health, the largest operator of hospitals in the region, has been hit by a financial scandal. Its businesses spread across 19 countries have been put under administration and Shetty, founder-chairman, forced to step down. 

Shetty, 77, has seen a tremendous rise in fortune since he started working in the UAE’s healthcare industry in the 1970s. In his own words, he had come to UAE with only $8 in his pocket.  

Over the years, he built hospitals and healthcare facilities and expanded into remittance transfer service. In 2012, NMC became the first company from the UAE to be listed on the London Stock Exchange. Its IPO raised more than $142 million. 

Two years later, Shetty acquired payments platform Travelex in a $1.2 billion deal. He owns two floors at the Burj Khalifa and a private jet. 

Trading of NMC’s shares has been suspended, and the company has now been delisted from the London Stock Exchange. 

Although NMC’s profits have continuously increased year after year, there was something unusual about the way the group was handling its debt. 

In December, short-seller Carson Block’s Muddy Waters pointed out that NMC’s financial statements were understating its debt and overstating the cash flow. 

Since then, Shetty’s empire has come crumbling down as it emerged that the actual debt of the group stands at $6.6 billion, far more than the $2.1 billion it had reported. 

A report by S&P Global said this could create problems for the UAE Banks, which are already dealing with low oil prices. 

UAE banks, which together have loaned $2 billion to Shetty’s group, risk losing 25 percent to 50 percent of their loans. 

NMC has borrowed heavily in previous years, taking loans from around 80 UAE and foreign banks. 

Abu Dhabi Commercial Bank alone has an exposure of $981 million, the biggest among local lenders, as well as an additional $181 million to Finablr, a London-listed remittance holding owned by NMC. 

Dubai Islamic Bank has an exposure of $425 million, with an additional $116 million via its subsidiary Noor Bank. 

Shetty is now facing fraud accusations, and the authorities have frozen his accounts in the UAE, which once honoured him with the Order of Abu Dhabi, the country's highest civilian award.   

He has close links with the ruling Hindu nationalist Bharatiya Janata Party (BJP). In his 20s, he contested municipal elections as a member of Jan Sangh, the BJP's predecessor. 

His ties to the nationalist party have endured and he was one of the main organisers of Prime Minister Narendra Modi’s visit to UAE last year. 

The NMC fiasco has drawn comparisons with the debacle of Dubai-based Abraaj Capital, the private equity founded by a Pakistani, Arif Naqvi, that was once the darling of investors. 

In both cases, the investors and regulators didn’t realise that the borrowed funds were being misused. 

A phoenix burning

A host of UAE banks have disclosed that they have lent money to the troubled agri-trading company, Phoenix Commodities. This week the First Abu Dhabi Bank disclosed that it has an exposure of $73 million to Phoenix, which is owned by Dhawan. 

Emirates NMD, Dubai’s largest bank, had loaned $23.66 million while Mashreq Bank is also a creditor to Phoenix, which is one of the largest rice traders in the world. 

It went into liquidation after its currency derivative arm placed a wrong bet and reportedly lost $450 million. 

The commodities trader has around $1.6 billion of debt on its books and the UAE banks could be sitting on loans of $400 million. 

Phoenix, which started operations in 2001 and now deals in grains, coal and metals, had reported revenues of $3 billion and gross profit of $151.8 million for 2019. 

Gaurav Dhawan, who till very recently was looking to enter India’s farming business, also surfaced in the ICIJ’s database of people who have multiple offshore accounts.