Guarantor to be Tagged Wilful Defaulter if Obligations Not Met: RBI

Mumbai: Tightening noose around loan defaulters, the Reserve Bank of India (RBI) on Tuesday said guarantors who refuse to fulfil their obligations to lenders despite having adequate resources will also be treated as wilful defaulters.

Once branded a wilful defaulter, a person or entity cannot access institutional credit. Neither can such a person hold office of director.

"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 apex bank said.

Elaborating, the RBI said that 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.

A guarantor could be individual or a company.

Also, in cases where guarantees furnished by the companies within the group on behalf of the wilfully defaulting units are not honoured when invoked by the banks and financial institutions, such group companies should also be reckoned as wilful defaulters, the circular noted.

With an aim to deal firmly with wilful defaults in payment of bank loans like Kingfisher, the government is also planning to come out with a separate legislation in the next session of Parliament.

Recently, United Bank of India declared Kingfisher Airlines, its promoter Vijay Mallya and three other directors as wilful defaulters citing alleged diversion of funds.

IDBI Bank is also considering similar action and is serving out a 15-day notice period on non-payment of dues.

As per the Contract Act 1872, the liability of surety is "co-extensive" with that of the principal debtor, unless it is otherwise provided by the contract.

Therefore, the RBI said when a default is made in making repayment by the principal debtor, the banker will be able to proceed against guarantor or surety even without exhausting the remedies against the principal debtor.

Lenders have to inform the Reserve Bank about guarantors while reporting wilful default cases.

There are over 40,000 cases worth Rs 1.73 lakh crore pending before various courts and debt recovery tribunals. In March 2014, the gross non-performing assets (GNPAs) in the banking system went up 4.4 per cent from 3.8 per cent of total assets in the previous fiscal year.

Gross NPAs of public sector banks jumped 39 per cent to Rs 2.16 lakh crore at the end of March 2014 from Rs 1.55 lakh crore in the previous fiscal year.

However, gross NPAs in case of private sector banks rose 13.76 per cent to Rs 22,744 crore as compared to Rs 19,992 crore at the end of March 2013.

During 2013-14, public sector banks recovered Rs 33,486 crore against the written-off amount of Rs 34,620 crore.