RBI Guidelines and Rules for Guarantors
The Reserve Bank of India (RBI) has established comprehensive guidelines and rules regarding guarantors in banking transactions, particularly focusing on the issuance and management of guarantees by banks.
1. Liability and Treatment of Guarantors
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The liability of a guarantor is immediate upon default by the principal debtor; banks can proceed against the guarantor without first exhausting remedies against the principal debtor.
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If a guarantor, despite having sufficient means, refuses to honor the guarantee upon invocation, such a guarantor may be classified as a wilful defaulter. This treatment applies to both non-group corporate and individual guarantors, but only for guarantees taken after the relevant RBI circular.
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Banks must ensure that all prospective guarantors are made aware of these conditions at the time of accepting guarantees.
2. Circumstances for Requiring or Waiving Guarantees
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Banks may waive personal guarantees for directors in public limited companies if the management, financial position, and viability are satisfactory.
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Guarantees may be required in cases where:
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The bank is not fully satisfied with the borrower’s financials or management.
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There is a delay in creating a charge on assets, to cover the interim period.
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The company’s financials show interlocking of funds with other group concerns.
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In the case of sick or stressed units, personal guarantees from promoters/directors may be obtained to ensure accountability and financial discipline.
3. Safeguards and Internal Controls
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Banks must issue guarantees in security forms with serial numbers to prevent fraud.
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Guarantees above a certain threshold should be issued under dual signatures and in triplicate, with a copy for the branch, beneficiary, and controlling/head office. The beneficiary must seek confirmation from the controlling/head office.
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The total volume of guarantee obligations should not exceed 10% of the bank’s owned resources, and unsecured guarantees should be limited to 25% of owned funds or 25% of total guarantees, whichever is less.
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Secured guarantees are preferred, backed by tangible assets or counter-guarantees from government or public sector institutions.
4. Payment of Guarantee Commission
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Banks must ensure that guarantees are not used by directors or managerial personnel as a source of income. No commission or fees should be paid to guarantors unless in exceptional circumstances, such as when existing guarantors are no longer connected with management but their guarantee is essential.
5. Prompt Payment and Compliance
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Upon invocation, banks are expected to make prompt payment under the guarantee to maintain credibility and compliance.
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Banks must adhere to regulatory frameworks, including the Foreign Exchange Management Act (FEMA), and ensure robust internal controls and risk assessment procedures.
6. Duration and Limits
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Guarantees should not be issued for periods exceeding ten years in any case.
These guidelines are designed to promote prudence, transparency, and accountability in the guarantee business, ensuring that both banks and guarantors fulfill their obligations responsibly and that the banking system remains robust and credible.
