By Stanley Carvalho and Tom Arnold

ABU DHABI/DUBAI: A Dubai-based gold and jewellery retailer has defaulted on loans worth about 500 million dirhams ($136.2 million) with banks considering options including legal action to retrieve the money four banking and trade sources told Reuters.

The non-payment by Atlas Jewellery which has more than 50 branches across the Gulf and in India affects at least 15 banks the sources said on condition of anonymity because the information isn't public.

It was not clear why Atlas Jewellery had failed to honour its debts. Company officials declined to comment and Reuters was unable to contact the company's owner M M Ramachandran.

Dubai police said the Indian national and his daughter had been arrested in cases relating to suspected bounced cheques.

Dubai has in recent years joined the likes of London New York and Hong Kong as a major gold trading centre thanks to its proximity to the world's largest gold consumer India and an aggressive drive to become a regional commodities hub.

This is the second scandal involving Dubai jewellery businesses since the city's rise to prominence as a significant gold trading centre. In March 2010 the Dubai Financial Services Authority sanctioned three brothers behind Damas International over unauthorised withdrawals from the company of 1.94 kg of

gold and cash worth about 365 million dirhams.

The sources said that banks affected by the Atlas allegations -- mostly local lenders but also including at least two Indian banks -- met last week to discuss the matter with some banks pushing for a hard line but others willing to write off the debt.

"At the next meeting of banks a common line of action to recover the money will be decided" one banker who attended the meeting told Reuters indicating that they would meet again in

early September.

LEGAL DILEMMA

The lack of consensus on how to proceed stems from United Arab Emirates' insolvency laws that make it challenging for lenders to seek legal redress against defaulters. Loan default which is a civil matter in most Western jurisdictions is treated as a criminal offence in the UAE.

When a wave of defaults hit UAE companies at the turn of the decade most banks chose to extend debt maturities rather than initiate proceedings through the courts.

Atlas Jewellery founded by Ramachandran in Kuwait in 1981 but forced to relocate to Dubai after its trading was suspended by the first Gulf War also has interests in real estate and healthcare. It owns and manages two hospitals in Oman's capital Muscat.

As a last resort banks are hoping they may be able to recover their dues by taking control of Atlas's healthcare business a second banker who attended the meeting said.

"Banks are in talks with other senior officials of the group to find a viable solution" he said.

The matter is complicated by the arrest of Ramachandran a popular figure in Dubai's gold trade and in the south Indian state of Kerala from where he hails.

Dubai police said Ramachandran was arrested on Aug. 23 by order of the prosector. "He is arrested and is in our custody" a spokesman said adding that investigations are ongoing.

Reuters