Thursday, September 11, 2014

Banks can treat guarantors as willful defaulters on their refusal to honour claim even if they have ability to pay

The RBI has issued following clarification with regard to guidelines on ‘willful defaulters’ as provided under master circular DBOD No.CID.BC.3/20.16.003/2014-15, dated 01.07.2014:

1)Inclusion of name of guarantors in the list of willful defaulters: It has been clarified 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. Thus, if said 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 willful defaulter.

However, this clarification would apply only prospectively and not to cases where guarantees were taken prior issuance of this clarification. Thus, Banks/Financial institutions (FIs) have been advised to ensure that this position is made known to all prospective guarantors at the time of accepting guarantees.

2)Terms ‘Unit’ and ‘Lender’ have been defined: Paragraph 2.1 of the master circular lists out various events when a “willful default” would be deemed to have occurred. Thus, in order to define the scope of definition of willful defaults, the terms Unit and Lender have been defined as under:

a)Lender: The term ‘lender’ includes banks/FIs to which any amount is due, provided that the due amount should have arisen on account of banking transaction, which includes off balance sheet transaction such as derivatives, guarantee and letter of credit.

b)Unit: The term ‘unit’ includes – individuals, juristic persons and all other forms of business enterprises (whether incorporated or not).