Banks fail to get counter guarantee amount

Banks fail to get counter guarantee amount

Laxmi Bank Limited and Nepal Investment Bank Limited (NIBL) have failed to receive the counter guarantee amount from Indian guarantor ICICI Bank after an Indian court halted the payment.

Laxmi and NIBL had given guarantee to 32MW Rahughat Hydel Project’s contractor—India’s IVRCL Infrastructure. The contract was terminated by Nepal Electricity Authority (NEA) over under-performance.

Following the contract termination, the Indian contractor filed a fraud case in Nepal’s Patan Appellate Court and a local court of Hyderabad, India. The Nepali court decided against the contractor, but the Indian court halted the payment.

The Nepali banks have paid around Rs770 million (Rs440 million by Laxmi and Rs330 million by NIBL) in performance guarantee to NEA, according to bank officials. The non-payment of the amount could hit the banks’ balance-sheets hard.

Laxmi CEO Sudesh Khaling said ICICI Bank has moved the Mumbai High Court, appealing against the Hyderabad court’s order.

“We believe ICICI Bank, India’s second largest bank, will ensure the amount is released to us, as a failure to do so will create reputational risks,” he said. “ICICI Bank is so confident in its appeal it has proposed us to deposit the equivalent amount in our banks we feel required.”

The Hyderabad court had stayed the payment about two weeks ago after the NEA decided to terminate the contract a month ago, declaring the project crisis-ridden.

A senior NIBL official also expressed confidence the Mumbai High court would give verdict in favour of the banks as it is an irrevocable guarantee. “ICICI Bank has expressed surprise about the court stay, saying they never encountered such an incident in the past,” said the NIBL official.

Officials at the Nepali banks said the bad precedent set in the case of payment of guarantee amount to Melamchi Drinking Water Project encouraged the Indian contractor to do the same.

In the case of Melamchi, a Chinese court—Zhengzhou Intermediate People’s Court—in January had ruled Melamchi Drinking Water Project cannot get the bank guarantee and advance payment guarantee amounts from banks concerned, terming the project’s claim “fraud”.

As a result, China Construction Bank, which was counter guarantor, didn’t pay the performance security of $6.62 million and guarantee for advance payment of $6.62 million and 1.4 million to Himalayan Bank and Bank of Kathmandu . Former contractor of the Melamchi Project—China Railway 15 Bureau Group—had filed the case in China after Melamchi terminated the contract in September 2012. However, the Patan Appellate Court in April ruled Himalayan Bank and Bank of Kathmandu must pay the amount to Melamchi.

Since the non-payment of guarantee amount from China, Nepali banks have started to properly screen the Chinese parties before offering guarantee.

Nepal Bankers’ Association had issued a notice to the commercial banks to be careful while dealing with Chinese banks. Bankers warn if similar cases repeat, there cannot be any global tender-related work in Nepal. “Nepali banks cannot offer guarantee, for which they receive a petty sum of money, if such incidents continue,” the NIBL official said.

Source: eKantipur