RBI circulars are not typically "
news worthy" items for common man, but it's new circular on Wilful Default created lot a flutter in the news. In the
recent clarification to the master circular, RBI mentions
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
The primary focus of this circular is definitely companies or individuals, who acts as guarantors for other companies, ensuring bank loans despite not having enough credit-worthiness. But it seems even the common borrower is going to suffer now.
What is a wilful defaulter?
In simple terms, if a person or company is unable to repay the loan it has taken, it is terms as wilful defaulter. An exhaustive definition can be
read here[PDF]. Once a banking institution, tags someone as "Wilful Defaulter", the person or company will have zero credit-worthiness and will be unable to get money on credit, apart from the possibility of legal proceeding against them.
How does this impact a common person?
Until this circular, no one really thought much before becoming guarantor for a friend or relative, while they were availing loans. A guarantor is thought only as a referral and expected to just ensure moral liability to the person taking the loan. The provision existed for banks to pursue the guarantor for recovering of loans, but only as a last resort.
With this new circular, the banks can
- Tag the guarantor as a wilful defaulter thus reducing credit-worthiness of guarantor to be zero
- Start recovery process of the loan from the guarantor in parallel with the original debtor.
This is a significant power to the banks and definitely makes sense against defaulting companies, where the borrowing is several hundred crores. But for smaller borrowers who take personal loans or car loans, it is now going to be impossible to find a guarantor.
