Gaurav Agarwal, a 38-year-old business owner based in Jorhat, Assam was stumped when he received a call from an agent asking him to make his employee settle the dues on a loan. Agarwal had no clue who this employee was and what loan he had taken. The agent, who claimed to be a representative of fintech company Cashe Finance, refused to listed to him and threatened him with consequences if he didn’t “somehow” make the employee pay.
Feeling harassed, Gaurav sought the help of his Bengaluru-based elder brother Jitesh, who called back the agent on the same day and tried to reason with him but to no avail.
Then followed a barrage of calls to both the brothers from different agents, all claiming to be from Cashe Finance. Outlook Money has heard the recording of one of these calls. “The agent started harassing me as well when I called to enquire why he was bothering my brother,” says Jitesh.
The next day, on March 28, 2023, the brothers filed a complaint with Cashe Finance regarding the unsolicited calls. Jitesh even posted his complaint on Twitter, tagging the Bengaluru Police.
About two weeks after they filed the complaint, Cashe Finance called Jitesh, and asked him to put their numbers on the do-not-disturb (DND) list.
Several weeks later, Gaurav found out that the loan was taken by one of his contractual employees.
When Outlook Money contacted Cashe Finance about the case in June, its chief communications officer Deepak Nair said, “We are concerned about what happened to this individual and would like to investigate this if this indeed originated from our end… We’ve had cases before which turned out to be false.”
Though the calls have since stopped, the case points to a larger problem. A casual search on Twitter will reveal several cases of collection agents harassing individuals who say they have never taken a loan or signed up as guarantors for others. Many don’t even know the so-called defaulter.
The Problem
If you become a guarantor, then you become liable to repay the loan if the borrower defaults. In addition, you also risk damaging your credit score.
Says Anoop Saxena, head—credit and operations, Star Housing Finance, “A guarantor is usually required where the borrower’s creditworthiness is uncertain or not strong enough to meet the lender’s criteria for approval. Specific requirements for a guarantor can vary depending on the lender’s policies and the type of loan taken.”
The real problem begins when the primary borrower defaults on the loan and the onus shifts on the guarantor. Adds Saxena: “Both the borrower and the guarantor may face legal action from the lender. This can include debt collection efforts and potential lawsuits, among others.”
Some non-banking financial companies (NBFCs) outsource such cases to recovery agents for a fee, which is usually a percentage of the total amount owed and recovered from the client. Says Saxena, “The specific payment structure and commission varies depending on the agreements between the NBFC and the agent. It may depend on factors, such as the type of loan, the age of the delinquent account, the recovery efforts involved, and any legal or regulatory restrictions.”
The agents need to comply with the applicable law during the recovery process, but that’s not always the case. Also, they often use tactics of shaming the individual by calling the neighbours or employers.
The recovery calls come as a shock for those who may not know what becoming a loan guarantor entails. But several users have also highlighted that they never signed up as guarantors.
Incidentally, financial institutions cannot sign up guarantors without their consent. In fact, the guarantor is required to fill up a separate application, providing their personal and financial information, along with supporting documents similar to what the borrower is required to submit. “The lender also evaluates the creditworthiness of the guarantor by reviewing their credit history, credit score, income stability, and other relevant factors,” says Saxena.
The guarantor and the borrower, typically, sign a guarantee agreement or co-sign the loan agreement, as required by the lender, he adds.
But there could be other reasons too that could create confusion. A branch credit officer at a leading NBFC in Kerala told Outlook Money on the condition of anonymity that loan agents inadvertently enter the wrong phone number sometimes. “The mistake can be rectified only at the main branch of the NBFC. People who get such calls report the case to their local branch, but sometimes the information is not conveyed to the main branch in time,” he says.
A customer service manager at the same NBFC said there could be another possible reason. “The (loan application) form has a separate head called ‘references’ which is possibly getting misused.”
For some digital personal loans, a video know-your-customer (KYC) procedure is followed, in which only the ID proof of the ‘reference’ is collected. “For digital personal loans, lenders typically verify the borrower’s identity and assess their creditworthiness only. The references are usually those who can vouch for the borrower’s credibility. They could be friends, colleagues, or family members,” says Saxena.
Lenders typically take the consent of the borrower before contacting the “references”. “Usually, borrowers provide the contact of their employers. That may have been the issue with Gaurav,” says the customer service manager we spoke to. However, he added that references are contacted only for getting in touch with the defaulter and not for payments.
What You Can Do
The Reserve Bank of India (RBI) has laid down clear guidelines that bar recovery agents from harassing and intimidating borrowers. Says Shashank Agarwal, advocate, Delhi High Court, “These guidelines also provide a grievance redressal mechanism that is to be provided by the banks and financial institutions.”
The first step one can take against harassment by recovery agents is to approach the grievance redressal cell of the said lender. Says Ankur Mahindro, managing partner, Kred Jure, a Delhi-based law firm: “RBI has introduced the Integrated Ombudsman Scheme, 2021 for tackling such issues. The individual being harassed can first first write to the financial institution. If no satisfactory response is received within 30 days, they can lodge a complaint on RBI’s Complaint Management System, https://cms.rbi.org.in/”.
Under the Ombudsman Scheme for NBFCs, which is separate from the integrated scheme, major areas of complaints include non-adherence to Fair Practices Code, non-observance to RBI directions and levy of charges without prior notice. These accounted for 75.32 per cent of the total complaints in 2022 as against 63.23 per cent in 2021, according to RBI data. However, the overall disposal rate improved to 96.59 per cent in 2022 from 92.52 per cent in 2021.
It is important to note that banks can act against the guarantor only if it has exhausted all legal action against the principal defaulter. “The bank should first act against the principal debtor by attaching collateral or filing a civil suit. Only then can they legally act against the guarantor. If these conditions are not met, the guarantor can approach the ombudsman,” says Manilal S., who has chamber practice in Kerala's Vanchiyoor court.
In case of references, “If they are harassed or disturbed, they can file a police complaint because it is the lender’s responsibility to search for the whereabouts of the borrower or get him to repay,” says Manilal.
So, should you sign up to be a guarantor? Says Sriram Jayaraman, a Sebi-registered investment adviser from Bengaluru: “If your child needs an education loan, then you can become a guarantor. Some lenders allow youngsters to take an education loan with the parents as a guarantor. I don’t recommend being a guarantor for friends or relatives.”
In general, becoming a guarantor should be avoided unless you know the borrower well and are willing to shoulder the liability.
aaron@outlookindia.com