Loan Guarantors Now Can Clear 'Wilful Defaulter' Tag


BANGALORE: According to the recent notification of Reserve Bank of India the individuals or companies acting as guarantors to a loan could also be declared willful defaulters, if they refuse to make payment of the dues despite having sufficient means but now even the guarantors have started fighting back, reports Business Standard.

"In case the...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," an RBI circular said. However, this will be applicable prospectively and not to cases where guarantees were taken prior to the circular.

"Banks/Financial Institutions may ensure that this position is made known to all prospective guarantors at the time of accepting guarantees," the central bank said.

The Reserve Bank's clarification came after banks had raised queries regarding inclusion of guarantors in the list of willful defaulters. The Reserve Bank defines a willful defaulter as a borrower who is able, but unwilling to pay, has diverted loan proceeds for other than their initially stated use or has overstated profits to obtain a loan.

"It is advised that in terms of Section 128 of the Indian Contract Act, 1872, the liability of the surety [guarantor] is co-extensive with that of the principal debtor unless it is otherwise provided by the contract," the RBI's notification said.