Clarification on npa status


SSI Exporter borrower had various loan accounts - Packing credit, Foreign bill discounting, Cash Credit, Mach Term Loan. To DRT, bank has repeatedly stated the NPA date as 07.04.07 due to 4 EMI outstanding in Mach Term Loan accounts and 3 export discounted bills were overdue. None of the account statements show that accounts were classified as NPA during April'07. Bank had not given any letter nor demanded any amounts before and after NPA classification. Bank issued Sarfaesi act 13(2) demand notice on 31.07.07.

Borrowers contention is that there were no EMI's outstanding at all as is reflected in the accounts and no export bills were overdue and also the buyer was covered under ECGC guarantee cover upon policy taken the exporter.

Now the question is, is it mandatory for bank to state in the statement of accounts that the accounts were classified as NPA on the particular date alleged by bank. If yes, under which RBI / Sarfaesi act / RDDBI act guidelines.

Can the borrower ask for dismissal of OA on this ground - no NPA classification at all?? Does he have good chances for success in  Counterclaim for all losses.

Thanks in advance for prompt advise.

 
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Practicing Advocate since 1986

Facts of the case what you have written in your Reply must be proved at the time of cross examination of witness and documents filed by Bank to dismiss Bank case in DRT.  GLOBAL LEGAL SERVICES , email: globallegalservicesindia@gmail.com


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retired banker

NPA Classification is the internal matter of the Bank and there is no need to intimate the date of NPA to the borrower.  All that is necessary before resorting action under SARFAESI Act is the bank should send a recall notice to the borrower demanding payment of entire dues.  If the bank has done this, it is right in invoking the provisions of SARFAESI Act.  As regards, ECGC cover, that also is an internal protection to the Bank.  Just because ECGC claim is available or in fact paid, it is not that borrower's liability is reduced to that extent.  Bank will ask for full recovery, if any recovery comes from the borrower, if ECGC claim is settled before recovery, the bank will send the proportionate amount to the ECGC out of the recovery. 

In your query, only one thing is to be seen, whether a recall notice demanding repayment is sent or not.  


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Recall notice before Sarfaesi act demand notice was notice issued.

As on NPA date mentioned in the 13(2) Demand notice, the balances in all accounts were within sanctioned limits / no discounted bills were overdue nor was there any other type of irregularity.

Is it mandatory for banks to file claims with ECGC and get paid before issuing demand notice under Sarfaesi act?? In our case, bank filed claims after Demand and possession notice.

If demand notices are issued against third party mortgagors before filing  claims with ECGC, how could sureties be liable to pay any dues since they are entitled to benefit of all securities held by bank as per sec 141 of Indian Contract act.

Can bank recover ECGC claim paid amounts from other sureties / mortgagors. 

Can bank take possession of third p[arty mortgagors properties for recovery of ECGC's claim paid amounts??

ECGC pays to banks 75% and 90% of Pre & post shipment defaults respectively. Bank is co-insurer for balance. Can they recover these balance amounts from principal debtor and other sureties??

Once ECGC pays the claim of Bank, the bank is no more a creditor - ECGC adorns the role of creditor. This way there is no debt due to bank. ECGC subrogates the claim recovery process to the bank. ECGC website states that it gives cover to banks to reduce their NPA's. RBI guidelines state that advances covered by Guarantees of Central Govt, even if overdue, should not be classified as NPA till invoked guarantees are repudiated. RBI states that guarantees of ECGC are by a sovereign entity. Therefore, can bank file OA at DRT to claim ECGC claim paid amounts from principal debtor and also Personal guarantee of directors or other mortgagors??

 
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Correction: Recall notice was not issued before demand notice under Sarfaesi act was served. The superiour of Authorised officer had asked him to issue recall notice followed by legal action under Sarfaesi act vide letter dt 1.08.07(Copy received under RTI). However, the AO issued demand notice on 31.07.07. How does this help the borrower's defense??? Pls advise.

 
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retired banker

You said recall notice is served before envoking the provisions of SARFAESI Act.  So, bank has got right to go ahead with its action. 

For classifying NPA, it is only the criteria that the accounts are within sanctioned limits.  There are other criteria also.  No Bank would like to classify the good account as NPA on frivolous grounds. 

It is not mandatory to file ECGC before issuing recall notice.  It is an internal matter of the bank and the benefits will not be passed on to the customer.  After receiving claim from ECGC if the customer repays any amount, proportionate amount to be refunded by the Bank to ECGC. Bank will recover the entire amount including the claim received from the ECGC and if the recovery is materialised it will refund the proportionate amount to ECGC.  Neither the third party surety/guarantor not the borrower could not get benefit of remission to the extent of ECGC claim received amount.  Even in the claim paid by the ECGC Bank is only the Creditor, there is no direct link as far claim matters are concerned between the borrower/guarantor and ECGC.  You are under misconception and fighting on a wrong foot. 

 
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