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.

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