Abrar Ul Mustafa
Has your friend or a relative asked you to stand as a Guarantor for a loan he is taking from a bank? Beaware! This can land you in trouble if proper security isn’t ensured. Following is an attempt from my side to highlight possible trouble that a Guarantor may face. The writeup is followed by some of the precautions that may be taken in order to ensure a certain level of safety.
First of all, being a Guarantor doesn’t mean that you guarantee that the borrower pays, it rather means that in case the borrower makes a default, i.e, he doesn’t pay the installments continuously, the Guarantor is Liable to pay if the bank isn’t able to recover the money from the borrower. In short, the Guarantor has to pay only when the borrower fails to pay. However, there are other legal rights that the guarantor may exercise over the defaulter later. These rights can be used by the Guarantor in the Court of Law against the borrower.
When somebody stands as a Guarantor to the borrower and there happens a default, it may leave grave impact over the Guarantor’s financial credentials in more than one way. This may result in the loss of the reputation and creditworthiness that he may be enjoying. This default on the part of the borrower may also affect the Guarantor’s ability and image to borrow from banks or other financial institutions. I would like to draw the attention of my readers towards one important and common matter that affects thousands and thousands of people. There are numerous Credit Reporting Agencies, e.g CIBIL, that keep records of the people’s financial histories. Every delinquency, overdue or irregularity in the Loan EMI payment gets recorded. This is done so as to assist Banks and financial institutions to arrive at an informed decision while considering and appraising a Loan Application. Negative remarks appear in CIBIL report if there is any past irregularity anywhere. These remarks may also appear if your friend or relative doesn’t make prompt repayments in the loan you have stood as a guarantor for. Those who pay their monthly EMIs out of the salary should ensure that delay in salary doesn’t affect their EMI payment. Even if salary gets delayed, EMIs should not be skipped because it gets recorded as an adverse remark in CIBIL.
Now, there are a number of things that may be taken care of while assigning yourself as a Guarantor. Firstly, ask the borrower to go for Split-guarantee. This means that the borrower shows two people as Guarantors. Even if the default is made, the liability has to be fulfilled by two people and not only you. Secondly, insist the borrower for short-term loans having a period of around a couple of years. The amount is not big and hence the risk gets diluted. Another safety measure is to see whether the loan is Asset-backed or not. For example, a car loan. Here, if the default is made, the amount may be recovered from the asset itself, i.e, the car. Avoid assetless loan guaranty, for example Education loan.
Postscript: Make a good research to ensure that the borrower is creditworthy and is capable of repayment. In addition to that, always be informed about the repayment cycle and always follow up with the borrower.
(The author is Scale I Officer in a PSU Bank)
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