All it used to take was a telephone call to reach Madhav Patel. But these days it is not so easy. The line to the Sharjah office of Solo Industries, in which the expatriate businessman holds a 49 per cent stake, is permanently engaged, a sure sign that the bill has not been paid. And what is reputedly his mobile number carries a 30-second recorded message of a man laughing heartily, followed by a curt announcement that the mail box is full.

For the 20 banks in the Gulf with exposure to the metal trader Patel’s disappearance is no laughing matter. In the UAE alone, more than a dozen institutions have extended loans worth $131 million to his companies. Add on facilities such as letters of credit (LCs) and letters of guarantee and the potential losses facing the banks could easily exceed $215 million. The best investigators, lawyers and accountants that money can buy have now been hired to untangle the complex web of business interests and track down Patel’s assets. But his present whereabouts are a mystery, with reports suggesting he could be anywhere between Brazil and Bombay.

The Patel affair is by no means the first financial scandal to rock the UAE. In the past two years alone, Dubai Islamic Bank has had to be rescued after the discovery of a $200 million hole in its accounts. Less high profile, but equally damaging, have been the intermittent reports of expatriate businessmen absconding abroad, leaving behind a trail of unpaid debts and angry creditors. Nevertheless, the latest incident is in a league of its own, not only because of its size but also the stature of the central figure involved.

No fly-by-night

Madhav Patel was no fly-by-night trader. For the past 20 years, he had built up what appeared to be a highly profitable metal trading empire in the UAE through Solo Industries, Zeeba Metal Company and Suminco Metal Trading Establishment. Business was conducted across Europe and Asia in a range of alloys including aluminium, lead and some precious metals. Although low profile, his stock was high. ‘He had an absolutely excellent reputation,’ recalls a rival metal trader. ‘He was a very respected figure and was trusted implicitly in the industry and the financial community.’ His respectability was enhanced by his brand being registered on the London Metals Exchange and Solo Industries securing an ISO 9002 accreditation.

Despite the 1997 slump in commodity prices and the first reports beginning to filter out of India of his father’s business – Hamco Mining & Smelting, previously known as Hindustan Alloys Manufacturing Company – facing difficulties, Madhav Patel’s reputation remained unblemished. Banks continued to beat a path to his door to offer credit facilities and loans. Even as late as early 1999, the Dubai branch of one international bank was celebrating after having reached agreement to double its credit line to Solo.

Good money

‘What you have to remember is that banks were making very good money out of Patel. He had an excellent payment record and banks were falling over themselves to lend. He was also a great talker and seldom requested additional funds,’ says one foreign banker based in Dubai.

By last spring, alarm bells were beginning to ring, however. In February, one of Solo Industries’ largest European customers, France’s Soficom, went into liquidation, leaving export bills drawn on the company in default. Reports of another European customer getting into financial difficulties soon followed, while in India, Hamco’s troubles became front-page news. A flood of worried phone calls to the Central Bank of the UAE and mounting speculation about Patel’s operations came to a head on 3 May 1999, when a statement was issued by the regulatory authority. It stated that 13 banks operating in the UAE had extended facilities to the Patel Group, which had been exposed to losses and that its Indian partner – Madhav Patel – had ‘fled’. It went on to say that all the UAE-based banks, four local and nine foreign, had the reserves and net provisions to cover the net losses.

Several of Patel’s bankers reacted with consternation to the central bank statement. In particular, the word ‘fled’ was strongly criticised. Said one at the time: ‘It is irresponsible to say that he has fled. He is simply in London preparing for a meeting with the banks to work out a rescue plan. There is no doubt that there is a problem, but it is certainly not adisaster. It is not a fraud. We believe a solution can be found.’ Patel himself endeavoured to provide reassurance. On 4 May, Dubai-based Gulf News carried an interview with him in which he claimed his troubles were temporary. He spoke of returning to the UAE in a matter of days.

The statement marked the start of the central bank’s involvement in the case. Acting as a co-ordinator, it hosted a meeting on 5 May with the group of banks during which it was agreed to appoint a team of lawyers and auditors. Two days later, the bankers headed off to London to have the first of several meetings with Patel. Although at least two of the creditor banks called for firm action to be taken against the businessman, the majority view after the first meeting was that Patel should be given the benefit of the doubt. ‘The problem was that it soon became apparent that the issue was so big and complex that most of the banks judged it could only be resolved in an amicable way, especially as he appeared to be working with the creditors,’ says a foreign banker present at the meetings.

On 12 May, Patel gave his last interview to the local press. Again, he reiterated his intention to return to the UAE, but said that the timing could be delayed by further meetings in London. The banks were not so convinced. Painfully aware that with every week that passed, the more money they would have to pay out on irrevocable LCs and letters of acceptance, the pressure to act was becoming unbearable. Creditors were also starting to learn of the true scale of the problem. One of the outcomes of the regular bank meetings was that for the first time, banks began to talk to each other. And they did not like what they heard.

Bad news

Since the London meetings, attitudes towards Patel have hardened considerably. Legal proceedings have been brought against him in both the UAE and the UK. Regulatory authorities have launched investigations into companies in Switzerland, the Netherlands, Singapore and the UK to determine their relationship with Patel and ascertain whether they were set up by him, or even his father, with the purpose of accessing funds. In the shipping industry, four carriers have been implicated for issuing questionable shipping documents.

At the same time, contact with Patel has been lost. On 1 August, the affair took a further twist, when it was reported from Kerala in Southern India that Paul Thottan, Solo’s financial controller, had committed suicide after taking poison. One senior Dubai banker believes he was murdered. Thottan was considered a key player in the case, having signed most of the loan and credit documentation papers.

As the investigations into the Patel Group go on, it may still be months before the full story is unravelled. Nevertheless, banks are convinced that they have been the victims of a massive fraud. The central allegation is that much of Patel’s trading activities was undertaken simply on paper. Some LCs are alleged to have been raised against goods never shipped. Others were reportedly established against high-value metals, when the actual content of containers was scrap. Bills of lading were also allegedly forged. One estimate doing the rounds is that of 3,000 recent transactions, only 19 were bona fide.

What is less contentious, however, is that the Patel case will have long- term implications for the UAE banking sector. One of the morals of the story is the need for banks to have a regular dialogue with each other. The strong suspicion remains that if bankers had shared information before last May, the warning signs would have become apparent much earlier.

Equally, the whole affair exposes the danger of abandoning due diligence, however credit-worthy a customer may appear. Routine checks seem to have been overlooked in the case of Patel. Banks have discovered that some bills of lading were not even stamped on board by carriers. At the same time, a call to the central bank’s credit risk bureau, which collates information on loans over a certain amount to individuals, could have provided valuable information on the exposure of Patel companies.

‘It would have helped but the problem remains that a lot of people didn’t seem to realise that Patel was involved in more than one company,’ says one government official. ‘There was also a perception that Patel’s core business was manufacturing. The turnover he did relative to the fixed assets clearly shows that it was primarily a trade operation, active in a very low value-added, high-risk field. It all comes down to knowing your customer better.’

The sentiment is shared at one of the foreign banks involved in the case. ‘Banks have to improve their standards of operations to levels which they employ elsewhere in the world. That means training, recruiting quality staff and better analysis,’ says a spokesperson.

Banks are still licking their wounds from the whole affair. In the UAE, individual loan exposure to Patel is understood to range from about $8 million up to a staggering $49 million. Bankers are still waiting to hear from the central bank on how the potential losses should be provided for. They expect it to be forgiving, allowing the banks to provision over two- three years, rather than in one go, which in several cases would require an injection of fresh capital.

There is no doubt that the UAE banking sector, with total assets of $55,041 million, annual profits of $1,253 million and total capital of $7,357 million, can handle the fall-out from Patel. But questions have been raised for foreign banks. Does the competitive nature of the market and the inherent risks associated with a large expatriate population justify a continued presence in the UAE? In recent months, head offices around the globe have had to make provisions in their group accounts for the potential losses, which, in some cases, are equivalent to two years of profit from their local operations.

So far, no bank has taken the drastic step of withdrawing. Rather, a thorough examination of lending policy has been launched. Says one leading local banker: ‘The Patel case is not an isolated incident. We now recognise that lending to expatriate businessmen active in certain trading sectors holds inherent risks. It is unfortunate, as there are a lot of very good customers out there, but we will not be booking any more middle market business, now that close to a billion dirhams has disappeared.’ The central bank has also acted. In the aftermath of the affair breaking, circulars were sent out to banks asking them to carry out extensive checks on expatriate traders known to have significant exposure levels. None came up with anything untoward.

Today, Solo Industries’ plant in the Sharjah industrial area is a sorry sight, lying abandoned. The office doors are firmly bolted and the yard behind is eerily quiet, with only the piled-high scrap metal giving the faintest indication of its past use. The investigators have long since departed, moving on to Europe in their quest to piece together Patel’s business network and locate his assets. And while the scrap yard gathers dust, it sends out a powerful message to the UAE banking sector. ‘Solo and Mr. Patel have been a wake-up call for everyone,’ says one banker philosophically. ‘The industry probably needed something this big for practices and standards to change.’