Banks dig in their heels over loan guarantees | Economic Times

Mumbai: Banks and borrowers are getting into a tug of war over personal guarantees after the Supreme Court allowed invocation of personal guarantees against defaulting promoters. While lenders are asking promoters to furnish a negative lien letter on assets owned by them, promoters are pushing back as their personal assets are sure to go under the hammer in the event of a default, despite the limited liability nature of the companies.“We are insisting on a declaration by promoters that allows us first charge rights over all of their movable and immovable assets, and they have to take our consent before selling any asset,” a banker in the know said. “In the past, we have faced issues where the promoters disposed of assets despite giving those as guarantee, but with a negative lien letter and the personal bankruptcy law, they won’t be able to get away with it.”Banks say that they are demanding proper documentation because several promoters have parked their assets in a trustee company or moved proceeds of a sale to overseas locations after promising property, shares and other assets as part of personal guarantee.Last month, the apex court upheld the legal validity of lenders’ efforts to drag individuals to a bankruptcy court. It also allowed resumption of personal bankruptcy cases against individuals that will allow banks to enforce the personal guarantee of the promoter, if lenders are not able to fully recover their dues after the insolvency resolution process.The Union government in 2019 introduced the law that allowed lenders to file cases against defaulting firms and individuals who guaranteed those loans. Lenders had then dragged defaulting promoters to court including Reliance Group’s Anil Ambani, Dewan Housing Finance’s Kapil Wadhawan and Bhushan Power & Steel’s Sanjay Singal, under this law.State Bank of India (SBI) has invoked guarantees in 16 cases to recover close to Rs 20,000 crore.While earlier, it was quite easy to get a personal guarantee, lenders said, promoters are very reluctant to give such commitments now.People in the know explained that banks have been insisting on personal guarantees on both working capital and term loans. To circumvent this rule, in entities where a large stake is held by a private equity investor, promoters are urging that lenders take guarantees from PE investors. Such requests have been shot down.“While we are persisting on such personal and corporate guarantees, several firms are not willing to furnish it after this law was put in place,” said another lender. “Several loan sanctions are either stuck or have been stopped because of the promoters’ unwillingness, but for us, it’s difficult to bank with a promoter who doesn’t show confidence in his own venture.”