Page 22 - Banking Finance October 2020

LEGAL UPDATE

Legal Cases

Act of god arguments sur- If you are a loan guarantor, Mishra, founder and CEO, Switchme.in,
a platform that helps borrowers shift
face in courts you liability will increase their home loans to other financial in-

Disputes over delays in the perfor- and credit eligibility will go stitutions.
mance of work contracts due to the
current pandemic have started surfac- down Any person can be a guarantor but
ing in courts. The contractor often Recently, a few people posted on so- generally, close family members sign
up for it in case they meet the lend-
rushes to the court as the employer cial media about getting fraudulent ers' eligibility criteria. "A person be-
threatens to terminate the contract calls from someone posing as a bank coming a loan guarantor has to satisfy
and encash bank guarantees. The Delhi official, who asked them to pay up a the credit eligibility criterion applicable
High Court, in last week's judgment, loan against which they had signed up for the loan applicants, which means
Crsc Research Institute vs Dedicated as guarantors. These people didn't his credit profile has to suit the lender's
Freight Corridor Corporation, allowed have to pay anything as these were loan eligibility criterion," said
the government entity to encash bank fraudulent calls, but what happens if Aggarwal.
guarantees, rejecting the prayer for you actually become a guarantor to
injunction against encashment. someone else's loan? Are you liable to The bank will check and ask for all
The court reiterated the principle that pay back the loan if the original bor- documents supporting the repayment
capacity of the guarantor. "The guar-
only if there is fraud of an egregious rower defaults? antor is a kind of borrower who is not
nature or irretrievable loss to one of The ongoing cash crunch due to covid- paying EMI on a regular basis but as
the parties can courts stop execution 19 has increased many people's liabili- soon as a default happens, he comes
of bank guarantees. The bank guaran- ties. Understand that becoming a guar- into the picture. So all know your cus-
tee clause is considered to be a sepa- antor can add to it. tomer (KYC) and income documents
rate agreement standing apart from Lenders generally ask borrowers to need to be submitted to check the eli-
the main contract. The contractor in bring in a guarantor when the loan gibility of the guarantor," said Mishra.
this case had to build 388 km of elec- amount is high or if the bank is not
tric broad gauge rail line. Extensions of In case the primary borrower defaults
comfortable with the repayment ca-
time to complete the project were pacity of the primary borrower. on loan repayment, the liability to pay
granted earlier, but the last stage was the outstanding amount falls on the
stalled in May this year due to the "The guarantor takes the responsibil- guarantor of the loan. "In case of a
pandemic. The corporation did not ity that if in any scenario, the primary default, the loan guarantor will become
grant extension this time, despite the borrower fails to pay the equated liable for timely repayment of the out-
Act of God clause in the contract and monthly instalments (EMI) of the loan, standing loan amount along with the
it threatened to terminate the con- then the guarantor will assume full penal rates and charges incurred due to
tract. repayment responsibility," said Aditya non-payment of the loan," said Gaurav

22 | 2020 | OCTOBER | BANKING FINANCE