Npa classification status and limitation aspect

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. 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. 

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??

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.