Npa before ecgc settles exporters claim
Meha Harish
(Querist) 05 December 2012
This query is : Resolved
Export client covered under ECGC standard buyer wise policy. He defaulted for 50% bill payment. Claim lodged with ECGC by exporter through the bank. Next week Bank classifies his account as NPA inspite of ECGC claim being in process and issues legal notice under Sarfaesi act 13(2) within 2 weeks of NPA. There are no overdues in any other account.
In view of RBI's NPA guidelines on Central Govt Guaranteed advances - was NPA classification legally correct??
Please advise ASAP.
Raj Kumar Makkad
(Expert) 05 December 2012
No. As per my observation there is no violation of the NPA guidelines in the given facts hence the notice is illegal which requires to be replied.
Devajyoti Barman
(Expert) 06 December 2012
File application u/s 7 of the SARFAECI Act challenging the notice and for injunction against attachment as well.
Meha Harish
(Querist) 06 December 2012
Dear Mr. Makkad,
Sincere thanks to you and Mr. Barman for your prompt reply.
Your observation is little confusing. You stated that "there is no violation of NPA guidelines in the given facts" and also stated that "hence notice is illegal which requires to be replied".
Please clarify once again.
Can I take defense of the following RBI guideline in my reply:
DBOD.No.BP.BC.15/21.04.048/2006-07 dated July 1, 2006
4.2.13 Government guaranteed advances:
The credit facilities backed by guarantee of the Central Government though overdue may be treated as NPA only when the Government repudiates its guarantee when invoked.
Do other banks classify accounts as NPA under similar circumstances as a routine??
I also approached ECGC for help. They say it is decision of bank and they cannot intervene.
Thank again.
c.p.s. ramachary
(Expert) 06 December 2012
In case of Export Credit Guarantee (ECG) Scheme, it has been held by the Supreme Court [ in State Bank of Bikaner & Jaipur Vs. M/s Ballabh Das & Co. & Ors. (AIR 1999 SC 3408 = 1999 (98) Comp. Cas. 219 SC) ] that the ECGC contract is for the benefit of the insurer and not for the benefit of the exporter(i.e. the borrower). It does not absolve the borrower of the liability to repay the amounts borrowed for the purpose of making exports if the foreign buyer of those goods does not make payment to the bank of the amounts payable in respect of those goods. Though the insurer / guarantor under the insurance / guarantee possibly would stand discharged from its liability to the insured on the exporters delivering the documents of export of goods to the insured, prima facie, the liability of principal debtor would still remain subsisting. Thus, the ECGC (settled / paid) amount should not be construed as debt. Further the amount paid by ECGC is refundable by the bank in certain proportion to ECGC on recovery from the borrower in legal action taken by the bank and for that reason undertaking is obtained from the bank (that the bank should take legal action against the borrower) as a condition precedent before settling the amount. If the bank does not take legal action for recovery of the debt from the borrower, then, the ECGC may recover the entire amount paid by it to the bank. Hence it is evident from this arrangement and understanding that, the amount of claim paid by ECGC is not a debt. It is different from the Government guarantee. Therefore the bank is in order in classifying the account as NPA and taking action under SARFAESI Act.
Meha Harish
(Querist) 06 December 2012
Dear Mr. Ramachary,
Thanks for your comments. I feel the above judgement is not applicable in this case for the following reasons:
(1)The ECGC policy I was referring to is between the exporter and ECGC for post shipment default by any buyer and the exporter pays the premium for this. In this policy, Exporter requests ECGC to cover the potential buyer for a certain limit based on value of order and deferred payment terms. ECGC after scrutiny may or may not approve the buyer. If approved, they pay to exporter the claim in case of buyers' default (subject to certain restrictions). The beneficiary of the claim is the exporter and it is not paid under recourse. Bank has no role in obtaining, monitoring or any say in this policy except to certify the Bill amounts and outstanding amount against the bills in default in the claim application of the exporter.
(2) As per Foreign bills discounting credit sanction terms, bank stipulated condition that it would discount only those bills whose buyers are covered by ECGC guarantee under the exporters policy. Further, they would also obtain Whole turnover pre and post shipment ECGC cover for advances sanctioned to the exporter.
In case ECGC guaranteed buyer defaults, the exporter lodges the claim and ECGC, after thorough scrutiny and upon satisfaction that adequate efforts have been made for recovery and no more recovery is possible, pays the claim to the bank on Exporters behalf, because the bank would have discounted the bills.
(3) Incidentally, after one year, ECGC settled the claim of the exporter in full and paid the bank 90% claim amount. However, during this one year, the exporter was classified as NPA, immediately Sarfaesi act was invoked, 13(4) was promptly served on expiration of 60 days. Exporter paid the bank the bills defaulting amount even though claim was pending at ECGC because of 13(4) notice and also kept on clearing interest dues regularly on written promise by bank to take measures to revive flow of funds on clearing these dues.
Bank persisted with recovery under Sarfaesi act even after bank being paid twice for this bills default - by exporter and later by ECGC. His SSI unit was made sick and unviable and the bank is now pursuing recovery at DRT for balance dues.
Now, I seek inputs for the exporters defense at DRT. The first line of defense, I thought should be illegal NPA classification, based on these above referred facts. Pls advise.
I am not a lawyer but a friend of the erstwhile exporter and now a street beggar.
Raj Kumar Makkad
(Expert) 06 December 2012
The line of action thought by you is correct to the extent that the NPA is illegally classified.
