Unilateral increase in claim period for Bank Guarantees to double cost for MSMEs

New Delhi, Mar 4 (KNN) While issuing a fresh Bank Guarantee (BG) or extending any existing one, Banks have increased ‘claim period’ of minimum one year from the date of expiry of validity period of the BG and charge accordingly.

Generally BGs are issued with no claim period or maximum 3 months claim period. Now even if one requires a BG for six months, Banks would charge for 18 months.

The trigger is supposed to have come from amendment in the provisions of Section 28 of the Indian Contract Act 1872 and Banking Laws (Amendment) Act 2012.

According to Banking expert S.P. Gupta, “Giving guarantee is a contractual matter between two or more persons forming part of a deal. The Government cannot and should not intervene between such transactions or its obligations except through judiciary and that to when called-for for compliance of contractual obligations”.

“By making this statutory amendment, the Government has unnecessarily jumped in commercial transactions. If parties to a transaction commercially settle for guarantee for a period of 6 months why should they be forced to have it for 18 months?”, he added.

According to Banks, they have consulted their law departments as well as Indian Bank Association that while issuing fresh BG or extending any existing BG, claim period of minimum 1 year from the date of expiry of validity period of BG had to be specified invariably.

Federation of Indian Micro and Small & Medium Enterprises (FISME) has termed it ‘grossly unfair’ and ‘economically disastrous’ for MSMEs.

“MSMEs already suffer from high cost of BGs as Banks demand upfront margin money, then charges for period the BG is in use and more than 100% collateral against BGs”, says FISME communique.

It will have very adverse impact both on exports and large number of MSMEs supplying through tenders both to the Government as well as private agencies.

The experts feel that the impact of this amendment will be huge.

Firstly, the liability is increased for the customers, which is not even required as per contract, due to increase in claim period by 12 months. Secondly, they have to bear the burden of additional bank charges for that unwarranted extended period. Thirdly, their BG limit will get consumed totally unnecessarily due to this additional requirement.

“The Banks are misinterpreting the amendment. The above amendment is supposed to be only applicable to financial guarantees. Under the pretext of abundant precaution some banks to quote SBI for example is extending it to performance guarantees as well, says S.P. Gupta.

While at present not all banks are insisting on extending the claim period by 12 months, SBI has been among the first which started demanding additional claim period. (KNN Bureau)

COMMENTS

Sharma 20/11/2021 3:14 PM

MSMEs are working on Ram bharose and departments are acting like vultures. Government will collapse if MSME collapses. IAS officers and Ministers proved themselves useless as far as MSME sector is concerned.

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tatyawinchu 09/06/2021 6:19 AM

Kuch bhi kar lo, aayega toh Modi hi. Another nail in the MSME coffin. Organized loot by the government babus. They should just add an HSN code for bribes given to babus at this point.

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Mukesh 22/09/2020 12:47 PM

In Most of the Govt. Departments the BGs are not releasing in due time or after completing of all dues. They kept the BG unneccessarily for demanding bribe. Resulting it will increase the corruption. By such type of ammendmend, why additional one year to be given to beneficiary of the BG. They have to aware himself for claim within actual period of BG either they have asked to bank/contractor to extend the BG for further period as required in due time. The validity and Claim Expiry date should be same for BG. It is well known most of the person that huge amount of Security Deposit or Performance Security Amount is kept in Govt. Department under their liability for more than 20-30 years, which are not released by the concern department, whereas generally defect liability period of any contracts expired in 3-5 years after completion of work. But in demand of bribe the above huge amount of SD/PG kept pending since long time and some contractors have passes away in waiting of releasing of SD/PG.

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Prithviraj Bhagat 22/09/2020 6:22 AM

Actually bank charges for additional 1 year should be collected at the time when original bank guarantee is submitted for cancellation. bank charges should be calculated on actual access months used. If original BG is not submitted beyond 1 year of expiry date, banks can debit to partys account bank charges for 1 year. Suppose if the bank guarantee is for 6 months and is returnend to bank within 6 month. customer has to unnecessarily bear charges for 1 year for which bank is not giving any service along with GST.

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11/09/2020 6:57 AM

THIS IS RIDICULOUS RULE I HOPE THE FINANCE MINISTER IS AWARE OF THIS. GOD SAVE MSME

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Nirmal 29/06/2020 8:38 AM

Govt has exposed itself towards the industries in-spite of having learned IAS officers how such error has taken place. Appeal to the learned IAS officers to stop govt from doing such unauthorized acts without any concurrence from none of the parties.

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Normal 03/04/2020 7:51 AM

Govt attitude to small industries has been unmasked . How long small can tolerate such tortures .

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T.E.Soundararajan 23/03/2020 2:56 AM

We have represented to the Ministry of Commerce,Finance, MSME thro CII and FIEO. Honourable Minister for MSME has sent the papers to Law Ministry. Hopefully they take a lenient view.

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RINKU 21/08/2019 9:48 AM

AVAILABLE ANY DOCUMENT FOR AMENDMENT OF SECTION 28 REGARDING CLAIM PERIOD OF ONE YEAR?

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Balasubramaniam 07/07/2019 6:59 AM

It is ridiculous...how can government dictate duration of a Performance Bank Guarantee between two parties ?

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Teju 22/05/2019 10:57 AM

Thank you for the information

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aman 04/05/2019 7:47 AM

This is truly impacting the MSME's. How can we-MSME represent against this amendment?, as the industry is facing financial implications due to this amendment.

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Aman 04/05/2019 7:46 AM

This is truly impacting the MSME's. How can we-MSME represent?, as the industry is facing financial implications due to this amendment.

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PANKAJ SHAH 26/04/2019 12:20 PM

as per section 28, the limitation to make a claim in Court of Law can be limited to a period of one year by including a clause in the guarantee. However the time period during which a claim can be made by invoking the bank guarantee is simply a matter of contract and is not governed by any law including section 28 of the contract Act.

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Anand 31/03/2019 3:51 PM

How can it be said that the amendment are only applicable for Financial Bank Guarantees?

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narendra 26/03/2019 12:16 PM

By virtue of making payment of commission on extended claim period of one year on account of amendment to sec. 28, MSMES are also have to shed GST on the commission which is a heavy burden. The banks can charge the commission on the extended claim period if the original BG is not secured and produced before the bank within a period of maximum 15 working days instead of charging upfront on such claim period. The said commission can be collected on quarterly basis instead of one year upfront. MSMEs are already in financial trouble and in view of this additional burden, their working capital shall be affected. They have to pay interest on utilization of working capital, additional GST and additional commission for such extended notional period. Hence, the government may make amendment to this extent in Section 28 accordingly and save the MSMES which are already financial trouble.

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