V N Kulkarni, counsellor at Abhay, a debt advice centre, says more and more people are approaching him to resolve disputes related to loan guarantees. “Many people have received notices from banks to repay a loan as the principal borrower has defaulted,” he explains.
Being a guarantor for loans is fraught with risk. If there are repayment problems, your credit-worthiness is under the scanner. Worse, your net worth might also be at risk because you will be expected to repay the loan as a guarantor. And, sometimes, your property could be attached.
Banks usually insist on guarantors for loans in which there is no collateral. This could be for personal loans, educational loans above Rs 7 lakh and commercial loans to business people.
A bank can insist on a guarantor for even small amounts, when it is not convinced about the borrower’s repayment ability. Also, situations such as a new job, a job in a non-recognised company and an equated monthly instalment to salary ratio above a certain percentage (40 per cent in most cases) could be reasons.
In the case of entrepreneurs, if one is running a small business or is a small-time contractor, a guarantor might be required. Ideally, the guarantor should be someone whose net worth is more than the loan amount.
If asked to be guarantor for someone, it is important to know the borrower personally. “Standing as a guarantor is a serious responsibility. It is not the same as merely introducing someone while opening a savings bank account. One should always exercise caution before agreeing to become a guarantor,’’ says Ram Sangapure, general manager, retail banking, Central Bank of India.
Check why the bank needs a guarantor. Especially if the amount involved is small, as it will indicate the lender is unsure of the person’s repayment capability. You will have to be direct and ask for the person for financial details — it is your money on the line. Check credit-worthiness of the borrower and verify if there is capability to repay the loan. Then, you should check the total liability involved.
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After this due-diligence, ascertain to what extent you can be involved. Meaning, for what amount are you willing to be a guarantor. “Banks do allow more than one guarantor on a loan. The loan amount can be split into different amounts,” says Sangapure.
If the borrower is unable to pay, the loan turns into a non-performing asset (NPA) for the bank after three months of non-payment. Banks, usually, wait for two to three months even after it turns into an NPA and continue engaging the borrower through various communications. If this does not yield results, then they issue notices to borrower and guarantor. H N Vishweshwar, general manager, planning and development, Syndicate Bank, says: “Whatever action the lender takes against the borrower, the same action will be taken against the guarantor. Banks can simultaneously proceed against the borrower and guarantor.”
Since only the remaining net liability can be recovered, the guarantor can request the bank to reduce the amount. If neither the borrower nor the guarantor pays, then it is possible that both their properties will get attached. Also note that in the case of a default, the guarantor’s credit-worthiness is also impacted. Credit bureaus take this into account while assigning credit ratings and it can hamper the guarantor’s own chances of taking a loan in future.
In sum, become a guarantor only:
- If you know the borrower personally
- After ascertaining the repaying capability of the borrower’s assets and liabilities
- After reading all the documents and being fully aware of the liabilities
- After ascertaining how much liability you can take on. i.e. how much you can repay in case of a default.
If, as a guarantor, you receive a legal notice:
- First, compel the principal borrower to repay
- If it is a genuine reason, check how much of the loan is left to repay
- Speak to the bank and request them to reduce the amount
- Don’t stretch the legal process, as you will also have to pay the charges on behalf of the bank.