RBI fixed guarantors' responsibility 2 years ago but not their credentials
It is good that the RBI in its September 2014 circular went tough on the guarantors of wilful defaulter but it should have at the same time made the credential of a guarantor also clear
Google Manmohan Singh and the results will be perplexing. The turban wearing sardar shown in the top result will not be the former prime minister of India. It will be Manmohan Singh, a farmer in his mid-50s, living in a nondescript Bilsanda block of Pilibhit district in Uttar Pradesh. All thanks to our ‘robust’ banking system.
Singh who migrated from his native state of Punjab to Uttar Pradesh some four decades ago was in for a shock last December when his two bank accounts in Bank of Baroda (BoB) — one having Rs 12,000 and the other Rs 4,000, were frozen as he was "guarantor" for former liquor baron Vijay Mallya. He was informed that following the directions from the head office his accounts were frozen. He was deprived of banking facilities as well as all kinds of government-sponsored schemes as he was guarantor to one of the biggest defaulters of the banking history.
A caller tune chanting a tapped slogan “Welcome to bank of Borada - India’s International Bank” plays on the mobile number of Mange Ram (branch manager where Singh had the account) but then dies after it fails to get response.
Ghanshyam Singh, the regional manager of BoB stationed at Shahjahanpur responds to the call and tries to explain the entire episode how a humble farmer went on to become a guarantor of someone like Vijay Malya, but fails miserably and ends up telling that the wrong done to Singh has been undone.
“It was some technical error. The farmer Manmohan Singh has nothing to do with Vijay Mallya. He is no where related to him, we have rectified his error. His account is active now. He is getting all the banking facilities. He is getting all the subsidies,” says Ghanshyam Singh.
On being asked how come he was shown as a guarantor of someone with whom any relation was not even a remotest possibility, Ghanshyam Singh says, “See it is being investigated that how did this happen, at this juncture I cannot disclose much.”
In September 2014, through a new rule the Reserve Bank of India (RBI) allowed banks to take action against guarantors on a loan, even without exhausting the remedies against the principal debtor, in case of a wilful default.
In the circular RBI stated, “In connection with the guarantors, banks have raised queries regarding inclusion of names of guarantors who are either individuals (not being directors of the company) or non-group corporates in the list of wilful defaulters. It is advised that in terms of Section 128 of the Indian Contract Act, 1872, the liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract. Therefore, when a default is made in making repayment by the principal debtor, the banker will be able to proceed against the guarantor/ surety even without exhausting the remedies against the principal debtor. 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. It is clarified that this would apply only prospectively and not to cases where guarantees were taken prior to this circular. Banks/FIs may ensure that this position is made known to all prospective guarantors at the time of accepting guarantees.”
In May 2012 the Supreme Court ruled that if a debtor defaults, it is the guarantor's responsibility to repay the entire loan. In the case Ganga Kishun of Uttar Pradesh, who had stood guarantor for a loan taken by his friend, Ganga Prasad, who died without clearing the loan was ordered to pay Prasad's dues as he had been the guarantor for the loan. Guaranteeing the loan is usually done in a very casual manner. Often family members or friends stand guarantee without understanding the legal ramifications.
While the requirements of being a guarantor makes anyone like Manmohan Singh fit for the job, it is the liabilities that can deter many. Being 18 years old and above, of sound mind and not agreeing to be a guarantor under any compulsion and not market as bankrupt allows one self to stand guarantee for anyone.
However, list of dos like seeking a legal advice before becoming guarantor; obtain a copy of the guarantee letter or contract and any other documents in relation to the loan transaction and ensuring all information on the outstanding balance of the borrower’s account is something which is often ignored.
Who can be guarantors, what are their credentials is something which is not far from ambiguity. It is good that the RBI in its September 2014 circular went tough on the guarantors of wilful defaulter but it should have at the same time made the credential of a guarantor also clear. Lack of it only makes the misuse of identities of likes of Manmohan Singh become quite easy.
There is no second thought on the fact that public interest is paramount than commercial interest of institutions
The court has told the banks to respond to Mallya's proposal within a week's time.