RBI right in declaring guarantor as wilful defaultor: Expert

Lenders can declare a loan guarantor as wilful defaulter when the primary borrower is declared so, said an advocate in the apex court.

Referring to the circular issued by the Reserve Bank of India (RBI), D. Varadarajan, a Supreme Court advocate, told IANS: "A guarantor is on the same footing as of a principal debtor. The liability of a guarantor is co-extensive of the principal debtor."

According to him, the RBI is on a strong legal footing on this aspect.

In a circular issued Tuesday, the RBI said: "While dealing with wilful default of a single borrowing company in a Group, the banks /FIs (financial institution) should consider the track record of the individual company, with reference to its repayment performance to its lenders."

"However, in cases where guarantees furnished by the companies within the Group on behalf of the wilfully defaulting units are not honoured when invoked by the banks /FIs, such Group companies should also be reckoned as wilful defaulters," the RBI said.

The RBI also clarified that a banker can proceed against the guarantor/surety in the case of a default by the principal debtor even without exhausting the remedies against the latter.

"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," the RBI said.

The central bank has urged the lenders to ensure this position is made known to all prospective guarantors at the time of accepting guarantees.

Meanwhile, the Associated Chambers of Commerce and Industry of India (Assocham) has termed the RBI's reaction as knee-jerk and said it is not the right way to tackle the non-performing assets (NPA) issue.

"We can understand banks taking recourse to guarantors after the lenders have exhausted the means of loan recovery from the principal debtors. But to straight away rush to the guarantor will set a very bad precedent, giving sleepless nights to the guarantors, rather than the borrowers," D.S. Rawat, secretary general, Assocham, said in a statement.

"Thus, the banks are shifting their responsibility of risk analysis, management and due diligence solely to the guarantors. We might end up in situation where the main borrower would even take the guarantor for a ride while he/she is able to get away with the mismanagement of funds," he added.

He said there is a basic flaw in the circular by RBI to banks wherein it is stated that the guarantor would also "be treated as wilful defaulter along with the principal borrower".

"But when you allow banks to proceed against the guarantor without even exhausting the remedies against the main debtor, it will be guarantor who will first be declared wilful defaulter because the remedies against the principal debtors have not been exhausted," Rawat said.

According to him, this would create an awkward situation and will hit the very core of trade and business- which is the trust among within the business community and among the family members/friends who stand as guarantors.