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Meha Harish (Proprietor)     23 November 2012

Npa classification status and limitation aspect

Limits Sanctioned on 31.11.05:

Packing Credit - 40L (ECGC guarantee + property value 15L) + FBD 50L ( Buyerwise ECGC guarantee by exporter + Bank's ECGC cover on sanctioned limit and bank would discount only ECGC covered buyers)

Buyer defaulted for Rs. 36L discounted bill due in Dec'06. In April'07, net outstanding Rs. 17L. Bank classified accounts as NPA in April'07. Issued Sarafaesi act 13(2) notice in July'07.

Post shipment default: Interim claim with ECGC filed by us in Dec'07 for 36L. Final ECGC claim filed by us (thru bank) for 17L in June'07. ECGC settled claim in May'08. ECGC paid 90% and we paid the bank balance 10%. Bank filed claim under its policy in Dec'07 and ECGC paid 90% in Dec'07.

Pre-shipment packing Credit: ECGC filed claim in Dec'07 for Rs. 40.29L. ECGC paid 30L(75%) in Dec'07. Bank recovered 10L from property sale under Sarfaesi act in Sept'08. Branch parked ECGC claim amount in saparate suspense account.

Bank filed OA at DRT against co and personal guarantee on 31.08.09 for recovery of 30L to pay back ECGC.

  1. Since ECGC claim is received for claimed amount - what is account classification status?? Is it NPA??
  2. Is the claim time barred under Limitation act??
  3. Please advise benefeciary of ECGC Packing credit claim amount as per RBI's following master circular:

 

DBOD No. DIR. (Exp).BC. 01 /04.02.02/2006-07 July 1, 2006 Circular on Rupee Export Credit:

2.6 ECGC Whole Turnover Post-shipment Guarantee Scheme

2.6.1 The Whole Turnover Post-shipment Guarantee Scheme of the Export Credit Guarantee Corporation of India Ltd. (ECGC) provides protection to banks against non-payment of post-shipment credit by exporters. Banks may, in the interest of export promotion, consider opting for the Whole Turnover Post-shipment Policy. The salient features of the scheme may be obtained from ECGC.

2.6.2 As the post-shipment guarantee is mainly intended to benefit the banks, the cost of premium in respect of the Whole Turnover Post-shipment Guarantee taken out by banks may be absorbed by the banks and not passed on to the exporters.

 The significant point here is - RBI advises banks not to pass on the ECGC premium to exporters towards the Post shipment guarantee of ECGC since it is for the benefit of Banks and it is intentionally silent about ECGC premium to be charged to exporters in case of ECGC pre-shipment advances guarantee. Therefore, it can be implied and safely concluded that if ECGC premium for pre-shipment advances is charged to the exporter then he should the beneficiary of the claim amount. In short, whoever pays the insurance / guarantee premium should be the beneficiary.

 
Thanks in advance


Learning

 4 Replies

c.p.s. ramachary (1500)     27 November 2012

Dear Mr. Bhatia,

 

In case of Export Credit Guarantee (ECG) Scheme, 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) held that the contract of insurance / guarantee is between the Export Credit and Guarantee Corporation of India Ltd. and the bank and prima facie the term / condition in the said insurance cover / guarantee referred to above 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 from  the liability to repay the amounts borrowed moneys 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 by 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 by ECGC that the bank should take legal action against the borrower as a condition precedent before settling the ECGC amount. If the bank does not take legal action for recovery of the debt against 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. The borrower enjoys lower rates of interest in export credit facility compared to other borrowers as his account would be covered under the ECGC scheme.

It has nothing to do with NPA classification. The bank is right in filing claim for unrecovered amount.

1 Like

malipeddi jaggarao (retired banker)     19 December 2014

1. The Bank can lodge ECGC claim only after classifying the account as NPA.  Though the claim is received there will not be any change in the status of NPA position. 

2. You are talking of which claim that is barred by Limitation Act?  Bank is right in keeping the claim received in separate suspense account.  There is no relation between the outstanding debt and adjustment of ECGC claim.  Though claim is received, the borrower is liable for the entire amount.  The beneficiary under the Insurance is the Bank, not the borrower, irrespective of who has paid the insurance premium. 

3. I fully agree with the opinion of Mr.CPS Ramachary. 

1 Like

Meha Harish (Proprietor)     21 December 2014

Dear Shri Ramachary / Jaggarao

My case is widely diffrent the that of Vallabhdas & Co...

The exporter had his own ECGC policy covering all his buyers. The Bill discounting terms stated that exporter should obtain such policy from ECGC and bank would discount only those export bills whose buyer was covered by ECGC. Bank also obtained post and pre-shipment advances cover from ECGC.

One of my ECGC covered buyer, whose bill was discounted requested additional time for payment and as per RBI guidelines we requested bank for extension of due date by 90 days which was granted. Buyer paid 50% and asked for further time of 90 days. The bank still demanded payment of outstanding dues in this account as a 'prerequisite' for renewal of credit facilities and suspended all credit facilities. Bank was threatening to take recovery action under Sarfaesi act. To be safe, we filed claim under our policy with ECGC with instructions to pay claim to bank and requested the bank to renew / revive credit facilities. In response, Bank immediately issued demand and possession notices under Sarfaesi act without waiting for fate of our claim with ECGC. ECGC, ultimately paid our claim in full after 1 year. Meanwhile bank issued Sarfaesi act demand notice> possession notice > we repeatedly paid arrears of principal and interest > to stonewall our repeated request for account revival / upgradation the Bank filed claims under its Pre & post shipment policies with ECGC who promptly settled their claims of over 60 Lakhs within 10 days without checking with us about the facts and even while our claim was in process at ECGC.

Can bank recover ECGC's claim paid amounts from other sureties?? As per sec 141 of Indian Contract act, Surety's right to benefit of creditor's securities.-A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and, if the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.

 

Can bank issue Sarfaesi act demand & possession notices for third party mortgaged properties even before filing claims with ECGC??

As per sec 140 of Indian contract act, Rights of surety on payment or performance. Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor. Therefore, ECGC is the creditor when they pay the claims. They subrogate the process of recovery from the 'exporter or any other person' to the bank. In its Annual Report, ECGC states that it gives cover to bank's to reduce their NPA's. Therefore how could there be a case of NPA or debt due after ECGC pays the claim. If there is no NPA or debt due, how could the bank filed OA at DRT??

malipeddi jaggarao (retired banker)     22 December 2014

I have replied to your similar query in another thread.  What for you are covering ECGC?  The Banks are obliged to give certain concessional facilities to exporters and might be dealing with high risk advances.  As a mitigating factor ECGC cover has to be obtained.  You should understand that the exporter will not get the benefit of claim as long as there are dues to the Bank.  You read again all the RBI circulars you are quoting.  You are picking up wrong threads.


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