By Sajad Bazaz
Let me share a small but significant situation with you. It’s tale of a dead man who had raised a loan and died without clearing it. The bank (lender) laid hand on the loan guarantor to recover the loan arrears from him after the death of the principal debtor. The guarantor got agitated over the bank’s approach for claiming loan arrears from him and contested it in the Supreme Court. The apex court ruled that the guarantor of a loan is liable to pay it if the actual borrower fails to clear it. The apex court direction also stated that the guarantor cannot insist that the creditor (bank or financial institution) must first exhaust all remedies against the principal debtor (actual borrower) before recovering the debts from the surety holders (guarantors).
I have been regularly receiving emails from a vast section of readers expressing ‘displeasure’ over the behaviour of their respective banks. Mostly, the major cause of their ‘displeasure’ has been banks making them (as guarantors) to repay loan amount of a borrower who had defaulted in repaying the loan within the stipulated repayment schedule.
Basically, there are lots of instances when guarantors had to face the music at the hands of banks after the borrower failed to repay the loan within the given time. It’s a practice here that people give such guarantees without knowing their responsibilities as a guarantor. I have also come across gullible people who had guaranteed repayment of a loan without knowing their status as a guarantor. They had mistaken their signing of loan documents as witnesses. But guaranteeing a loan is vastly different from signing a document as a witness.
Is guaranteeing just a simple formality to help someone obtain loan? No, it’s not. It’s a responsibility. In fact, it’s a duty. If anyone signs a guarantee deed to be a guarantor for someone else’s loan (debt), he is accepting that he would be taking on the financial and legal responsibility for paying off the loan if the actual borrower for whom he has stood guarantor defaults in its repayment.
So, as a guarantor you give a written promise to take on serious legal and financial responsibilities. If the borrower doesn’t pay back the loan according to the terms of the contract, the bank has the legal right to force you, as a guarantor, to pay the money back instead. So, one has to be very clear on his obligations as a guarantor before signing on the guarantee deed.
It’s not that you should never be a guarantor to anyone. But it is always advisable not to rush into anything that one is unsure about. You should always know full assessment of the borrower’s worth or financial position, whether he is able to repay the loan or not. I have never seen a person while acting as guarantor going through the guarantee deed. Mostly, the guarantors always sign these legal documents in a hurry. But this hurry has most of the time resulted in their casualty. Once the actual borrower defaults in loan repayment, the guarantor has to face the pressure of the bank to repay the outstanding loan amount.
So, before you guarantee a loan, first read and understand the nature of the guarantee. Don’t sign a document that you have not read or sign a document which is in fact a blank form or a partially completed form. After stepping in as a guarantor, ensure that you keep a track of the repayments of the loan.
You have a right as a guarantor to ask certain important questions to bank – the lending institution. What is the total amount of money needed to pay off the loan at a specific date? How much the borrower does currently owes to the bank? How much has already been paid? What is the overdue amount? It is obligation on part of the bank to give you all such information as a guarantor.
Here it is important for the banks to make the person (guarantor) aware about his risks and responsibilities as a guarantor.
You may also be thinking to withdraw the guarantee. But the decision in this regard is the prerogative of the lender (bank). Precisely, being a guarantor is as good as taking a loan yourself, in terms of credit exposure. Please note, this could impact the amount of loan that you as the guarantor can take in future, as the banks can factor your potential obligation as a guarantor. Meanwhile, you can sue the borrower if you, as a guarantor, had to pay out his debt under the guarantee.
(The views are of the author and not the institution he works for)
If the borrower doesn’t pay back the loan according to the terms of the contract, the bank has the legal right to force you, as a guarantor, to pay the money back instead.