BackDYK: A guarantor can also be tagged as a wilful defaulter
Banks can take action against a guarantor without exhausting the remedies against a principal debtor
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Being a guarantor of a loan means shouldering a lot of responsibilities. And the Reserve Bank of India (RBI) has made it a little bit more difficult. The central bank, in a 9 September notification, stated that a guarantor can also be tagged as a wilful defaulter if she refuses to pay the amount demanded by the lender despite having sufficient means to pay the dues.
Who is a guarantor?
A guarantor of a loan is a person who agrees to be accountable for repayment of the borrower’s debt in case of default. Say, you are a guarantor for your brother’s education loan. If he, the borrower, cannot or does not pay the dues, you, the guarantor, will have to repay the borrowed amount.
The change
Banks have always had the right to recover money from the guarantor if a borrower defaults. Usually, when a borrower defaults, banks use their recovery policy to reclaim the amount, and this process varies across banks. Banks initially approach the borrower, and if it is unable to recover the debt from the borrower, it then approaches the guarantor. If you are the guarantor and the bank decides to recover the money from you, the entire amount that is due will have to paid by you.
RBI’s recent circular on wilful defaulters states that banks can take action against a loan guarantor even without exhausting the remedies against the principal debtor. If the guarantor refuses to comply with the repayment demand made by the bank, even on having sufficient means to pay the dues, the guarantor will also be treated as a wilful defaulter.
However, this rule applies only to those people who have become guarantors after 9 September, when the RBI circular came into effect. If you signed as a guarantor before this date, the rule doesn’t apply to you. RBI has instructed financial institutions to inform all prospective guarantors of the consequences of default at the time of accepting guarantees.
What you should know
If you are termed as a wilful defaulter, you may not be able to access services or facilities from any financial institution for starting a new venture for five years. Added to this, you may be barred from participating in the capital market. Criminal action against wilful defaulters, under the existing legislation, can also be initiated by financial institutions whenever necessary.
Also keep in mind that when you sign up to be a guarantor, your eligibility to take a loan comes down significantly. Generally, when you approach a bank for a loan, if you are a guarantor, it will take into account the amount you have guaranteed and reduce your eligibility by that much. Your credit report will show your details as a guarantor of a particular loan and if the borrower defaults, the same will reflect on your credit report as well.
So, the next time a family member, friend or colleague approaches you to become a guarantor for their loan, do a thorough check of the person’s financial background before saying yes.
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