Responsibilities of a loan guarantor

A 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
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Customer loyalty in banks has always remained a challenging task. With digital banking emerging a new norm; this challenge stands more complex for banks.

The web of technology integrated into the delivery mechanism of services and products has raised the expectations of customers.  And maintaining these high voltage expectations usually leads to break in the circuit of service delivery mechanisms. Even an iota of fall in such expectations triggers customer defection.

So, under the circumstances, when exclusive digital banking units have become a reality, retention of old customers is one of the biggest challenges for banks than winning new one.

Today, we witness an unprecedented surge in customer grievances/complaints wherein banks are mostly blamed for breaching commitment and not adhering to fair banking practices. This all has culminated in customers’ disloyalty.

As far as fair banking practices are concerned, a bank, as an institution, cannot afford to be unfair to its customers as its operations are driven by banking regulations. However, breaches are there, which mostly happen only at individual levels. In the end, such breaches in delivery of services harm the business of the bank as customers look for alternative channels.

We usually see that customers have a general tendency to get their bank-related work done quickly. They don’t bother to make themselves aware of the essential features and the important terms and conditions of the product or service which they are availing. Even the bank staff at the operation level doesn’t bother to educate the customer about the features of a scheme in a transparent manner.

Let me explain. If a customer wants to open a savings bank (S/B) account, he approaches his bank branch, fills up the application form and submits it. He complies with the required KYC (know your customer) norms and submits the relevant documents.

At this stage, firstly, the customer should have normally enquired about his rights as an account holder. He should have even looked into terms and conditions governing his account. Secondly, the bank official was duty-bound to apprise himself about the features of the account.

Even terms and conditions such as minimum balance requirement, penalty for non-maintenance of minimum balance, charges for operations in the account, cheque book charges, nomination facility, applicability of tax deduction at source (TDS) on interest etc. should have been told to the customer.

However, in majority cases neither the customer bothers to seek details about his rights and duties as an account holder, nor the bank officials bother to make him aware about the guidelines governing his account operations.

Very rarely do we see customers seeking information regarding service charges for availing digital services like  debit/ATM card/credit card, internet banking etc. or getting to know about loan processing charges, frequency of change in interest rate on loans, cheque collection or cheque bounce charges.

Meanwhile, over a period of time, a huge segment of bank customers feel themselves at the receiving end as banks have been chasing them for being guarantors in a loan account.

Basically, the dilemma of guarantors is not a new phenomenon. Guarantors wrongly consider that being a guarantor is just a formality to help someone to obtain a loan. 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 hands on guarantors and recover money from them in absence of the principal borrower.

In other words, guaranteeing the loan repayment 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 the guarantor’s assets and use the funds to pay for the principal, interest and other costs.

What is the responsibility of a guarantor in a loan case?

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.

Reserve Bank of India (RBI) rules allow 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).

However, a guarantor has a right to ask certain important questions to the bank. What is the total amount of money needed to pay off the loan at a specific date? How much does the borrower currently owe to the bank? How much has already been paid? What is the overdue amount? It is an obligation on part of the bank to give all such information to the guarantor.

What are the risks of becoming a guarantor?

As already stated, a loan guarantor will be liable for the timely repayment of the loan. In case of a default, the bank can ask the guarantor to repay the outstanding loan amount along with other charges and penalties incurred due to non-repayment.

It’s worth noting that any default or delay in the loan repayment will also adversely impact the guarantor’s credit score.

It also has an impact on the loan eligibility of the guarantor. A guarantor’s loan eligibility can be reduced by the outstanding amount of the guaranteed loan. It is worth mentioning that the outstanding loan amount of guaranteed loans is considered as contingent liability for the guarantor.

What are the essential things to keep in mind for a loan guarantor?

A guarantor should always persuade the borrower to opt for loan protection insurance plans. This insurance plan covers the loan amount and will reduce the guarantor’s repayment liability arising due to the unfortunate demise or disability of the borrower.

Before extending the guarantee, a guarantor should thoroughly verify the financial stability and discipline of the borrower. It’s also advisable to keep a close tab on the repayment activities in the loans guaranteed by you. Don’t forget to fetch your credit report at regular intervals as any default or delay in the loan repayment will spoil your credit report.

Besides, a guarantor needs to assess his/her future loan requirements before assuming the responsibility of the loan guarantor.

Remember, a loan guarantor cannot withdraw from the responsibility of being a guarantor till the bank is offered an acceptable new replacement as guarantor.

DISCLAIMER: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK

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