It’s harsh being a guarantor
Few years before, Nitin Bhalla had stood a guarantor for his friend’s home loan. Now, he wants to opt out, but the bank is unwilling to play ball. This is despite his friend paying his equated monthly instalments (EMIs) regularly. The bank wants him to continue as a guarantor for the current dues.
“The guarantor cannot shirk his responsibility now. The bank had taken both his and the borrower’s creditworthiness while disbursing the loan,” says V N Kulkarni, chief counsellor, Abhay Credit Counselling.
Need for guarantors
Most banks will ask for a guarantor when the value of the security offered is lower than the loan. In case of home loans, the mortgaged property itself is a security with the bank. Yet, some banks can ask for a guarantor, if they fear the value of the mortgaged property will decrease, or if the borrower’s income looks uncertain.
Few banks may not ask for a guarantor, but insist on a co-borrower. This, however, does not change anything for the co-borrower. His role and liability are the same as that of a borrower if the first applicant defaults.
Banks offering educational loans above Rs 7.5 lakh usually accept the parent as a co-borrower. But the bank may insist on an additional guarantor, if it thinks the parent alone is financially incapable of servicing the loan.
Loans above Rs 10 lakh, taken by small and medium enterprises, also need a guarantor.
Locked in as guarantor
Relieving a guarantor is solely at the bank’s discretion.
“Banks usually exhaust all their resources to get the borrower to pay up, before asking the guarantor to pay up,” says S Govindan, general manger, personal banking and operations, Union Bank of India.
Most banks are not willing to relieve the guarantor. But the option may be considered if the guarantor is able to convince the bank of his\her reasons for not wanting to continue.
A guarantor can ask to be relieved when an additional loan has been granted without his consent. He will, however, be liable until the original amount of the loan has been repaid. In both cases, the bank will insist on having a substitute guarantor. From the recovery point of view, banks have the right to recover the default amount from borrower and/or the guarantor. And, unless the guarantor claims himself\herself insolvent, the bank will try and recover as much of its dues as possible from him\her, say bankers.
In case the bank has some tangible assets of the guarantor on which a charge has been created with the bank, it can invoke the provisions of theSecuritisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, or SARFAESI Act, and auction the guarantor’s assets for recovery of its dues.
If the guarantor’s assets are not mortgaged with the bank, it could approach the Debt Recovery Tribunal, a fast track court for recovery of debt for banks. When there are no assets that can be liquidated, the bank would initiate legal action against the guarantor in the civil courts.
Loans for oneself
Being a guarantor is as good as taking a loan yourself, in terms of credit exposure. Some banks inform credit bureaus about both their borrowers’ and guarantors’ exposures.
“This could impact the amount of loan that the guarantor can take in the future, since his\her potential obligation as a guarantor is factored in by lending institutions,” saysSamir Bhatia, managing director and CEO, Equifax Credit Information Services.
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