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Economy

Watch Out Before You Guarantee a Loan; RBI Says Banks Can Tap You Faster

If you are asked to be a guarantor to a loan, here’s something to think about: RBI has said you will be a wilful defaulter if you refuse to honour the guarantee.

That should be pretty obvious. If you’ve guaranteed a loan, and the original borrower doesn’t pay, you’ve got to.

But earlier, the concept was that the bank would first try to recover money from the original borrower. Once it had exhausted all means of doing so, only then could it chase the guarantor. The problem was that a typical legal case to recover money from a borrower can take years, as the rich among the defaulters will use their legal firepower to stall cases forever. (A certain Mr. Mallya comes to mind?)

Now the RBI changes the game, with a notification.

If a borrower doesn’t pay, the bank can immediately ask the guarantor to pony up the cash, even as it pursues action against the original borrower. If the guarantor doesn’t pay, he becomes a Wilful Defaulter, a term that can have serious repurcussions; that person cannot get bank loans, cannot be on the board of a company that gets bank loans and so on.

Also, this concept can be used by any lender (a bank or financial institution) including someone that was owed money in a derivatives transaction, where there have been disputes and customers saying they won’t pay (and it wasn’t clear they could be marked as a wilful defaulter).

I guaranteed a relative’s loan, do I need to worry?

Luckily not any more than you did till yesterday.

The new concept – of chasing a guarantor immediately rather than waiting for the borrower to resolve – is only applicable for loans made from now onward. So Mallya will still get his legal kicks.

But what this does mean is: Think very carefully before signing on as a guarantor for anyone’s loans!

  • D.Rama says:

    Why would I guarantee anybody else’s loan in such circumstances? It becomes a needless liability without any benefit. Essentially the guarantor becomes someone who is a second borrower without actually borrowing the money. A kind of “Buy 1 get 1 free” for the bank. Loan to one, recovery available from two!
    After this RBI notification, banks should not expect personal/auto/home loans to have guarantors! If they do insist, their business will drop drastically. And that’s a guarantee!