Need for guarantors
Most banks will ask for a guarantor when the value of the security offered is lower than the loan. In case of home loans, the mortgaged property itself is a security with the bank. Yet, some banks can ask for a guarantor, if they fear the value of the mortgaged property will decrease, or if the borrower's income looks uncertain.
Few banks may not ask for a guarantor, but insist on a co-borrower. This, however, does not change anything for the co-borrower. His role and liability are the same as that of a borrower if the first applicant defaults.
Banks offering educational loans above `7.5 lakh usually accept the parent as a co-borrower. But the bank may insist on an additional guarantor, if it thinks the parent alone is financially incapable of servicing the loan.
Loans above `10 lakh, taken by small and medium enterprises, also need a guarantor.
Locked in as guarantor
Relieving a guarantor is solely at the bank's discretion.
Banks usually exhaust all their resources to get the borrower to pay up, before asking the guarantor to pay up.
Most banks are not willing to relieve the guarantor. But the option may be considered if the guarantor is able to convince the bank of his/her reasons for not wanting to continue.
A guarantor can ask to be relieved when an additional loan has been granted without his consent. He will, however, be liable until the original amount of the loan has been repaid. In both cases, the bank will insist on having a substitute guarantor. From the recovery point of view, banks have the right to recover the default amount from borrower and/or the guarantor. And, unless the guarantor claims himself/herself insolvent, the bank will try and recover as much of its dues as possible from him/her, say bankers.
In case the bank has some tangible assets of the guarantor on which a charge has been created with the bank, it can invoke the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, or SARFAESI Act, and auction the guarantor's assets for recovery of its dues.
If the guarantor's assets are not mortgaged with the bank, it could approach the Debt Recovery Tribunal, a fast track court for recovery of debt for banks. When there are no assets that can be liquidated, the bank would initiate legal action against the guarantor in the civil courts.
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