How Guarantors and Co-Borrowers Can Avoid Loan Default Risks?

Common loans in India, whether it’s a home loan, a business loan or an education loan, are a trend practised by co-members or business partners. But not everyone who signs on the dotted line is subject to the same responsibility under the law. Citizens can also participate in a shared loan as a co-borrower and sponsor, which are the two main positions frequently taken.
Although both of them have liability in case of default, neither is liable to the same extent and nature. What’s more, there aren’t many who are aware of the legal ramifications until a default has been realised.
At this point, we should break down the meaning of these positions, what lenders’ rights are, and how sponsors and co-borrowers can protect themselves against financial and other forms of difficulty.

What’s a Co-Borrower and a Guarantor?
A co-borrower is someone who bears equal responsibility for repaying the loan. In most cases, a co-borrower benefits from a loan, such as in a property owned by two or more people or a family business.
However, a sponsor (guarantor) isn’t typically entitled to the benefits of the loan but promises to pay the dues if the borrower fails to do so. Friends, relatives, or any other person working in business together with them fill this role in good will.
The two functions are both legally binding and can lead to:
● Recovery action
● Asset seizure
● Credit score impact

In cases of default.

What Happens in the Case of Default?
It’s held below Indian banking norms and judicial precedence that after being classified as an NPA (Non-Performing Asset), the bank acquires the right to:
● Demand repayment from any co-borrower or sponsor
● Make an application in Debt Recovery Tribunals (DRTs) under the SARFAESI Act, 2002
● Call on security (i.e., foreclose on collateral)
● Report defaults to credit verification agencies such as CIBIL, ruining the credit rating of all signatories

This means you’re taking on risk even if you’re only a sponsor of the loan.

Indian Law: Legal Defence and Rights
Indian Contract Act, 1872
This act was made to protect the sponsors. For example, if a change in the original contract is made without the sponsor’s knowledge, they may be relieved of liability.

Banking Codes and Standards Board of India (BCSBI)
Banks are required to notify sponsors about risks. If not, the guarantee’s enforceability may be compromised.

Judgments of the Supreme Court
In State Bank of India v., the Court reiterated that creditors may take actions against sponsors without exhausting remedies against the principal borrower, but only within the contractual framework.

Tenable Defence Against Risk

1. Know Your Contract Well
   Never sign anything without reading and understanding your obligations, especially with bank loans. Always take a copy of the loan agreement and sanction letter.

2. Keep a Check on the Loan Account
   Sponsors and co-borrowers can access the loan status. Set reminders or request quarterly statements to track repayments.

3. Bargain Limited Liability Clauses
   In rare cases, banks may agree to limit the sponsor’s liability in writing.

4. Indemnity Agreement
   Sponsors can enter into a private indemnity agreement with the borrower to protect themselves in the event that they end up paying on the borrower’s behalf.

5. Use Early Legal Notices
   If you detect signs of default, send a legal notice to both the borrower and the bank. This document raises your awareness and can shield you from future proceedings.

Consumer Forums and Resolution Alternatives
The sponsor or co-borrower may resort to Consumer Forums if they believe they were misled or not informed about the risks. Additionally, banks may consider renegotiating loan terms upon receipt of a written request citing genuine financial difficulty. These may include:
● Lower EMIs
● Temporary moratorium
● Settlement of instalments

Last Thoughts: Prevention Is Wiser Than a Cure
Being a sponsor or a co-borrower in India isn’t just a formality—it’s a binding legal obligation with potentially devastating consequences. Before accepting such roles, always perform due diligence. Learn, participate, and protect yourself legally if you are already a party to such an arrangement. Remember, your financial future could be at risk due to someone else’s default.