RBI Goes after Guarantors

Will it stop wilful default this time?


The notification of the Reserve Bank of India (RBI)—that individuals and companies who fail to honour guarantees provided to wilful defaulters can also be charged with ‘wilful default’—is welcome and long overdue. Especially since the notification says that the ‘group concept’ will come into play when persons, or entities, do not honour guarantees to companies within a group. This is a huge step forward. For the 30 years that we have been reporting on business and finance, there has been endless debate about applying the ‘group concept’ to bad loans, especially when there is deliberate mismanagement of companies in a group. After all, corporates grow when new entities in a group (sister companies and subsidiaries) piggy-back on the parent’s goodwill to raise funds.  

But RBI has also said that the new norms would apply prospectively; this means that all the games companies played in the past will have no consequences. In India, corporate guarantees, including personal guarantees of well-known industrialists, had a magical way of disappearing from loan conditions after fund-raising needs were met, or the going got tough. Some of the most respected corporate groups in India have used this trick to evade responsibility for loss-making entities.

The change in loan conditions could not have happened without the active collusion of lenders which means that RBI’s new norms will also work only if the regulator puts in place a system to monitor crucial changes in loan conditions. Vijay Mallya, recently declared a wilful defaulter by United Bank of India (UBI) in connection with Kingfisher Airlines, also escapes the new provisions. While most industrialists used to keep room to wiggle out of the personal guarantee, the flamboyant Mr Mallya wanted to be different. He went to court to fight for the right to pay himself and UB Holdings a fat fee for the loan guarantees provided to Kingfisher. It is a mystery why lenders are still fighting shy to invoke that guarantee.

RBI governor, Dr Raghuram Rajan, recently said that the “wilful-defaulter tag is a powerful weapon in the hands of creditors for resolving distressed assets.” Indeed, it is; but a weapon is powerful only if used correctly and effectively.

One recalls that RBI, bankers and government officials were just as gung-ho about the SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act) 2002 which was touted as the ultimate statute to end the bad loan problem by giving banks a powerful recovery mechanism.
Strangely, RBI has never been called to explain why the monumental failure of SARFAESI was not anticipated or how just 50 corporates have run up a combined default of about Rs40,000 crore under its watch. If 33 debt recovery tribunals (DRTs) under SARFAESI failed to deliver (as of March 2012, there were 67,000 cases involving over Rs1,36,000 crore pending before the DRTs), will the new norms make a difference? After all, companies will still misuse the judicial system to delay any recovery action.



Veeresh Malik

2 years ago

The ground level reality of RBI and banks going after guarantors is also that a large number of now elderly people who stood guarantee whether knowingly or out of ignorance or were simply tricked into standing guarantee in their earlier days with their clear title assets then are now going to lose everything they thought they owned while those who they stood guarantee for and are often their own children have long ago flown the coop or are simply not interested in solving the issue.
It is more than sad to listen to them.


2 years ago

What RBI and Bankers have failed to realize is that stricter laws do not necessarily translate into a healthier credit portfolio. As a Banker involved in credit dispensation for last 3 decades, my experience has been that 50% of bad loans are created because of faulty credit decisions by Bankers either because of pressure of target, deficiency of knowledge or plain corrupt measures. In such cases, the securities are either less or allowed to be diluted so that not much is left when the related SARFAESI laws are invoked. What the laws can do to augment recovery when security itself is defective or inadequate by design?

US bombings on ISIS near Baghdad destroy six vehicles

The US attack south-west of Baghdad was the first strike and destroyed six IS vehicles near Sinjar and an IS fighting position southwest of Baghdad that had been firing on Iraqi forces


The warplanes from US carried out their first air strike on the Islamic State near Baghdad, as world diplomats pledged to support Iraq in its fight against the militants.


Early last month, the US began air strikes against IS positions in northern Iraq, but Monday's announcement that the campaign had targeted the jihadists near the Iraqi capital marks an escalation in the scope of the mission.


It comes less than a week after US President Barack Obama, in a prime-time television address to the nation, ordered a "relentless" war against the Islamic State, including air strikes in Syria and expanded operations in Iraq to "destroy" the marauding jihadist army.


"US military forces continued to attack ISIL (IS) terrorists in Iraq, employing attack and fighter aircraft to conduct two air strikes Sunday and Monday in support of Iraqi security forces near Sinjar and southwest of Baghdad," US Central Command said in a statement.


"The air strike southwest of Baghdad was the first strike taken as part of our expanded efforts beyond protecting our own people and humanitarian missions to hit ISIL targets as Iraqi forces go on offense, as outlined in the president's speech last Wednesday."


The strikes destroyed six IS vehicles near Sinjar and an IS fighting position south-west of Baghdad that had been firing on Iraqi forces.


They bring the number of US air strikes across Iraq to 162.


It came as representatives from about 30 countries and international organisations, including the United States, Russia and China, met in Paris to discuss the crisis triggered when IS overran large areas of Iraq and Syria, carrying out beheadings and forced religious conversions.


The savage beheading at the weekend of a Briton, the third Western hostage to be executed on camera, raised the stakes in the battle against the jihadists, who have declared a caliphate and have as many as 31,500 fighters, according to the CIA.


In a joint statement, diplomats vowed to support Baghdad "by any means necessary, including appropriate military assistance, in line with the needs expressed by the Iraqi authorities, in accordance with international law and without jeopardising civilian security.


SBI increases interest rate for deposits between 180-210 days

SBI said in view of abundant liquidity coupled with slower than anticipated credit pick up it also decided to cut interest rates for deposits between one year to three year by 25 bps to 8.75%


State Bank of India (SBI), the country's largest, state-run lender said it has revised interest rates for select term deposits below Rs1 crore from 18th September due to abundant liquidity and slower credit pick up.


"SBI decided to cut the deposit rates by 25 basis point to 8.75% in the one-three year term, while increasing interest rate by 25 basis points for deposit between 180 to 210 days period," the lender said in a statement.


SBI said, "With the inflation also trending down at a faster clip, this rate adjustment will continue to ensure that the savers are compensated adequately with a positive real rate on their deposits."


(All figures in % per annum)


Existing rates

Revised rates

w.e.f. 18/09/2014

180 days to 210 days



1 year to less than 3 years




While deposits from 7 days to 179 days would continue to earn the same interest of 7% per annum, for deposits of 180 days to 210 days, the interest rate has been revised upwards to 7.25%. The interest rate for deposits from 211 days to less than one year would remain unchanged at 7.5%.


However, for deposits for a period ranging from 1 year to less than 3 years, the interest rate will be reduced by 0.25% to 8.75% from 9%. For deposits of three years to less than five years, interest rate will remain unchanged at 8.75% while deposits of five years and above will continue to earn interest of 8.5% as earlier, SBI said in the statement.


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