Negotiable Instruments: Exhaustive Coverage by Adv Roma Bhagat. Register Now!
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ashween bhutani   27 August 2015

Withdrawal of collateral security

A Third party collateral has been offered to the bank against cash credit and other limits of two firms at the bank. Now the owner of the property is demanding to withdraw the gurantee and collateral security from one of the firms which has cash credit limit, bank guarantee limit and term loan. He has written to the bank to withdraw the same. Bank has given letter to the firm regarding replacement of collateral securities and substitution of personal guarantees. The firm has replied that as of now they do not have collateral and as and when they have it they will inform the bank. what will the bank do now and what are the legal implications? can the bank pressurise him by freesing the limit? what should the owner of collateral do now.


 2 Replies

SIVARAMAPRASAD KAPPAGANTU (Retired Manager)     28 August 2015

Collateral Security/Personal Guarantee are given by virtue of a tripartite agreement ie. The Borrower, Guarantor and the Bank. Bank is the beneficiary of the Collateral Security/Personal Guarantee. Bank has given limits to the borrower based on inter-alia the collateral security/personal guarantee. Release of a Guarantor or Collateral Security is the decision of the Bank. Depending upon the present status of your account with the bank ie. Performing Asset or Non Performing Asset, they shall take a view. Liability in the account also is a factor. In case the value of the Collateral Security/Personal Guarantee is enough to cover the present liability (not the limit. Limit can be more than liability), you can approach the Bank to reduce your limit to the present liability whereby the collateral security/personal guarantee shall be enough as per the banking norms. One thing to be remembered is that nobody can withdraw a collateral security by giving a mere letter. As of personal guarantee, Guarantor can withdraw his Guarantee at any time and the limitation shall run agtainst the Bank for 3 years from the date of letter withdrawing the guarantee.Bank can initiate legal action against the Guarantor within the Limitation period as explained above. Whether Bank shall freeze the account? May be or may not be. It depends upon the present status of your Cash Credit account. Therefore, please go the Bank and discuss the matter and get the matter amicably settled instead of running to a Lawyer. Taking legal steps by you and/or Guarantor will only complicate the issue and compel the bank to take drastic action as per their norms.

JaysonB   30 March 2022

Yes, the bank can influence the decision to lower the rate

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