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Surety for Loan is Risky Now

 

Surety for loan is Risky Now



If borrower is declared a wilful defaulter, claim will be made on guarantor

 

With the Reserve Bank of India (RBI) tightening norms for guarantors, standing surety to a loan is set to get tougher in the coming days.

The central bank has said that individuals and entities furnishing guarantees for borrowers, who turn out to be wilful defaulters later, can also be classified as wilful defaulters, if they refuse to clear the dues.

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.

There is no change with regard to the liability of a guarantee, as the responsibility to pay the debt is clarified in the Indian Contract Act. However, the guarantor now needs to understand that hereafter, in case a borrower is declared as wilful defaulter and a claim is made on the guarantor to discharge the liability, the latter, too, will be declared as a wilful defaulter if he refuses to pay the amount, despite having resources to make the repayment. Your credit score -which affects your loan eligibility in future -could also get impaired.

The information on the guarantor is reported to credit bureaus such as Credit Information Bureau (India) or Cibil, by the lenders. Thus, getting a loan will be a challenge as the defaulter tag will impact your credit score.

Moreover, the bank need not wait till all avenues of recovering the outstanding amount from the borrower have been exhausted. The action can be initiated immediately upon default by the debtor. The liability of the guarantor was always co-extensive with the principal debtor. However, now, persons or entities who extend guarantee need to be more cautious, as the lender will be able to proceed against any guarantor even without exhausting the remedies against the principal debtor in case of any default or non-repayment.

The new rules will lead to prospective guarantors becoming more cautious at the time of standing surety, say loan consultants. There is more clarity now and guarantors will become more serious about the entire matter. So far, the impression amongst guarantors was that the lender could initiate action against them only as the last resort. Guarantors who thought that the lender could pursue them to recover the loan only after the debtors throw their hands up and their assets are liquidated will now need to pull up their socks. Now, the guarantor is as good as the borrower if the latter wilfully defaults on repayment. The lender can immediately knock on your doors once the default takes place.

Clearly, given the grave implications of standing surety under the changed circumstances, be extra cautious while entering into such an agreement. As a guarantor, you have no recourse once the default takes place.

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

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