RBI: Classify guarantors as wilful defaulters if demands not met

RBI to Banks: Group firms, management can be tagged as defaulters

The RBI has made it clear that the term ‘unit’ will include individuals, juristic persons and all other forms of business enterprises, whether incorporated or not.

Tightening the guidelines governing loan defaults, the Reserve Bank of India (RBI) on Tuesday said guarantors, group firms and management can also be classified as wilful defaulters by lenders.

If the guarantor refuses to comply with the demand made by the banker despite having sufficient means to make payment of the dues, such guarantor would also be treated as a wilful defaulter, the RBI said in a notification to banks.

“This would apply only prospectively and not to cases where guarantees were taken prior to this circular. Banks/FIs (financial institutions) may ensure that this position is made known to all prospective guarantors at the time of accepting guarantees,” it said.

Once a borrower or guarantor is classified as defaulter, banks will cut further advances to such defaulters and initiate legal actions for recovery of the funds owed to the banks. Banks have seen a rise in wilful defaults in the recent past.
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, when 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,” the RBI said.

The RBI has made it clear that the term ‘unit’ will include individuals, juristic persons and all other forms of business enterprises, whether incorporated or not. In the case of business enterprises (other than companies), banks may also report (in the director column) the names of those persons who are in charge and responsible for the management of the affairs of the business enterprise, it said.

Further, while dealing with wilful default of a single borrowing company in a group, banks should consider the track record of the individual company, with reference to its repayment performance to its lenders. Commenting on the development, chairman of a public sector lender said that banks have already been implying it. “We are already moving in this direction in the case of Kingfisher Airlines,” he said.

According to banking sources, combined default by 50 corporates amount to over Rs 40,000 crore of bank loans. “Most of these corporates have refused to pay up despite having capacity for repayment. Banks will have to declare them wilful defaulters,” said a banking source.

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Lauding the RBI decision, Ashvin Parekh, senior expert – advisor, global financial services of Ernst & Young, said, “It is a landmark step and it will enforce a new line of discipline… The move will result into creating a boundary that will cover the group entities that act as guarantor and the promoters, directors and managers of the company.”