End of the current financial year is less than two weeks away. This is the peak time when bankers turn like soldiers in combat dress. They take route of all possible measures to recover money from the defaulters. Here it’s a common practice among bankers to lay hand on guarantors to pressurize the principal borrower to repay the bank loan. Actually, the banks don’t hesitate to recover loan installments from the guarantor’s account if the principal borrower fails to deposit the loan instalments.
But this surgical strike on the guarantors’ account is not taken well by the guarantors. They call it ‘unjustified’ action. The other side of the story is that many guarantors have been struggling to live a routine life as the banks have forced them to repay someone else’s debt. The situation has led to unrest in family relations, neighbourhood and friend circles.
Believe it or not! A loan guarantor who is regularly losing substantial portion of his salary to fund the non performing business account of his neighbour has threatened self-immolation. Let me reproduce a few lines of his email received a few days back.
“I sought help from the bank to compel the borrower to repay the loan, but they don’t pay any heed to my request and continue to transfer money from my salary account to the defaulter’s loan account. I am on the verge of starvation and there is every apprehension of self immolation. Is there any legal way to get out of the misery?”
Basically dilemma of guarantors is not a new phenomenon. Banks have been chasing guarantors since decades to force the defaulting borrowers to fall in line and repay the overdue loans. However, over a period of time the banks got strong legal backing to lay hand on guarantors in absence of principal borrower to recover money.
For example, in September 2014, through a new rule the Reserve Bank of India (RBI) allowed banks to take action against guarantors on a loan, even without exhausting the remedies against the principal borrower, in case of a wilful default. The RBI circular further states, “As such, where a banker has made a claim on the guarantor on account of the default made by the principal debtor, the liability of the guarantor is immediate. In case the said guarantor refuses to comply with the demand made by the creditor/banker, despite having sufficient means to make payment of the dues, such guarantor would also be treated as a wilful defaulter. It is clarified that this would apply only prospectively and not to cases where guarantees were taken prior to this circular. Banks/FIs may ensure that this position is made known to all prospective guarantors at the time of accepting guarantees.”
Even the supreme court ruling is on record which states that the guarantor of a loan is liable to pay it if the actual borrower fails to clear it. The apex court direction also states that the guarantor cannot insist that the creditor (bank or financial institution) must first exhaust all remedies against the principal debtor (actual borrower) before recovering the debts from the surety holders (guarantors).
Basically, people wrongly consider that being a guarantor Is just a simple formality to help someone obtain loan. Actually, It’s not so. It’s a responsibility. If anyone signs a guarantee deed to go guarantor for someone else’s loan, he is accepting that he would be taking on the financial and legal responsibility for paying off the loan if the actual borrower for whom he has stood guarantor defaults in repayment of the loan amount.
Guaranteeing the loan is usually done in a very casual manner. Often family members or friends stand guarantee without understanding the legal ramifications. The problem gets compounded when the guarantor cannot remedy the default owing to lack of sufficient financial resources to meet any of the financial obligations flowing from the borrower’s default. In this situation the bank can sell off guarantor’s assets and use the funds to pay for the principal, interest and other costs.
However, you have a right as a guarantor to ask certain important questions to bank. What is the total amount of money needed to pay off the loan at a specific date? How much the borrower does currently owes to the bank? How much has already been paid? What is the overdue amount? It is obligation on part of the bank to give you all such information as a guarantor.
(The views are of the author and not that of the institution he works for)