Filter Coffee #232

On Neither a Lender nor a Guarantor Be

Bengaluru

The response to FC 231 on ‘Coping With Regrets’ was overwhelming. Most of the reactions were cathartic, just as I had intended them to be when I wrote the post. I have taken the liberty of abridging them by deleting some personal aspects. Please be indulgent and read what they have to say or share.

• Dr Nandakumar: “My two take-home words from your piece are - 'mental rumination ' and 'reflective meditation’. While the former throws you into depths of despair, the latter is not an easy task at all. I too have my share of regrets - thank you for suggesting a remedy.”

• Tarun Kunzru: “We tend to either romanticise the past or be over-critical of the past. It's the conscience-impacting decisions of the past that linger and are heavy on regret. I typically try to introspect/dwell on these by looking at them holistically - this helps deal with the regret element substantially.”

• Lakshmi Raman: “Good morning Prasanna. This week's FC is in a more serious vein. I recall reading in an ad (of all things) the following words: ‘Four things come not back - the spoken word, the sped arrow, time past and a neglected opportunity.’ I suppose regret accompanies all or any of these but the essence is that these are things we cannot undo. Reflection, meditation and, if the regret relates to relationships, reaching out, helps mitigate its intensity.”

• Jayachandran: “While one may be tempted to contend that regret is rather a negative phenomenon, as opposed to reflection, it will perhaps be right to say that regret leads most often to reflection, which plays a constructive role in shaping our ability to cope.”

• Prof Jagadish: “Regret is a normal human trait over what feels to have been a wrong choice that one made in the past. Let's face it: the outcome of a decision that you make will be known only after the choice is made. So, every time you choose an option, you are taking a gamble. This has nothing to do with one's qualifications, level of knowledge or intelligence. Permit me to share my experience. One of my brothers, whose care was my responsibility, suffered a cerebral haemorrhage. He went into a coma and the neurosurgeon called me up the next day and gave me the choice of treating him in the least intrusive way and hoping for his recovery or putting him in an oxygen tent, with various kinds of pipes etc. and trying to revive him, with no guarantee however. I asked him what the probability was of his recovery under the two options. When he told me that it was 50-50, either way, then I felt that there was no sense in prolonging his life as a living dead entity. Then came the critical moment: I had to sign a declaration related to my choice, exonerating the doctors and the hospital of all consequences. Once I finished putting my signature, I felt numb all over and grew stiff. It was like I had signed my brother's death warrant. I had begun to regret my decision immediately. My brother passed away the next day and I couldn't get over my regret for a long time. There was an elderly retired doctor in our neighbourhood who was a good friend and always stopped to chat. He wondered what was wrong with me. I explained to him in detail about my regret. He replied that what I did was very good for my brother since if I had taken the other option I would only have prolonged his suffering and held him back from being peaceful. That helped me. So, Prasanna, you may feel bad, but what you did for your uncle was probably the best.”

💸 Neither a Lender nor a Guarantor Be

This post may appear to be a master class on the legal aspects of the maxim that I had alluded to in the past but it is relevant even today. You may be familiar with the words “Neither a borrower nor a lender be”. These were the words of wisdom that Lord Polonius had for his son Laertes, as he embarked on his visit to Paris for his education in the first act of Shakespeare’s ‘Hamlet’. At the time when Hamlet was being staged, it was common for the gentry to borrow recklessly to fund their lavish lifestyles, and were often forced to part with their estates to ward off the debt collectors. The Shakespearian phrase rings true even today.

All of us, at one time or another, have encountered the painful situation of having lent money to a friend and found ourselves losing both.

What many people don’t realise is that lending a person something doesn’t necessarily mean that they are borrowing from you. The problem with lending is its voluntary character. If a friend comes to you and narrates a situation he is in, you offer to lend them the money they need, often without stipulations, but, of course, with the hope of getting it back. But in their mind, you are lending of your own volition, and so they are not actively borrowing. It sounds strange but if you reflect on it, the thought process makes sense. If you contrast this with borrowing in the traditional sense, it involves a reason, a predicament, and most importantly, an assurance (sometimes simply a ‘God Promise!’) of timely repayment. So the borrower borrows from you and that’s what you may tell someone “He borrowed and now he is not to be seen or heard”. If it was a case of lending you would say “I lent him some money but he is showing no interest in returning it to me”. You might get a rebuke for that “Who asked you to lend? Better to write it off”.

Can one be a lender without a corresponding borrower? It would appear so, when you offer to give money unsolicitedly. Interestingly, we don’t take anything in writing when we lend, particularly when we feel compelled to help someone, but we may set some understanding (even if it’s not legal terms) when someone borrows. We shy away from stipulating terms to a friend or relative, but we do it quite willingly when the borrower is your driver or maid. Somehow we do our credit rating of that person! What an irony, right?

Whether you lend or someone borrows from you, the consequence of non-repayment is the same. As Lord Polonius says, in the same scene: “For loan oft loses both itself and friend, and borrowing dulls the edge of husbandry.” In simple English, it means that when you lend money to a friend, you often lose the friendship as well as the money, while borrowing turns a person into a spendthrift.

A few of my friends tell me that when they lend money to someone they write it off and don’t lose sleep over it. Charitable indeed! Another friend told me in a conspiratorial tone “When I lend money, I not only write it off, but also don’t tell my wife to make sure I don’t lose sleep over it…” Funny guy!

There’s also a second, non-monetary type of lending. A neighbour or friend asks you to lend your iron box, toolbox, your scooter or even your car! Well, you need to deal with these requests tactfully. Particularly if the guy borrowing has selective amnesia.

Here’s an anecdote: Bob & Tom are walking back home late at night after a movie. They are accosted by a thug who asks them to hand over all the cash they have. Tom takes out a wad of notes and hands it over to Bob and says “Hey Bob, here’s the money I owe you.” That’s some quick thinking!

Now, I turn to a more serious issue — that of the perils of being a guarantor. The law relating to Guarantees is enshrined in the Indian Contract Act. A contract of guarantee is a three-way contract between the borrower (debtor), the lender (creditor) and the surety (guarantor). Usually, a contract requires the passing of some consideration. The borrowing and lending constitutes adequate monetary consideration to bind the borrower and the lender. The guarantor does not benefit from the transaction, yet the fact that the borrower gets the loan on his being the surety is itself sufficient consideration for him to get contractually bound to discharge the debt if the borrower defaults.

One has to be extremely careful before offering to be a guarantor. Let’s imagine a scenario. X borrows a certain sum from Bank B, to conduct his daughter’s marriage. His friend, Y, agrees to be a guarantor. The Bank accepts him as a solvent guarantor as he draws a good salary and also has property in his name. Now, due to some unforeseen losses in his business, X defaults on payment to the Bank. The Bank, instead of proceeding against X to recover the money, may get the guarantor’s salary and even his property attached. Here the guarantor’s liability is coextensive with that of the borrower. If you ever find yourself compelled to be a guarantor you could include a condition that the lender must exhaust all remedies against the borrower and then only proceed against the guarantor. But this is easier said than done.

You must exercise a great deal of discretion and circumspection before you lend money or stand as guarantor. There have been situations where the borrower is an alcoholic or addicted to drugs unbeknownst to the guarantor, and that can cause a lot of grief beyond just the monetary loss. Lending is a matter for the mind to decide and not the heart. As difficult as it is, it’s important to keep personal feelings out of the picture and be purely logical. And sometimes that means steeling yourself to say No! even if the borrower says, “Trust me, I will give it back!”

You must have seen this sign in many stores: “In God we trust, rest in cash.”

Lending money to a relative or standing guarantor may cause a lot of heartburn if that relative fails to repay the loan. Besides that relative becoming a persona non grata, the estrangement of families could be collateral damage.

In some cases, a financial institution may want two guarantors. If you are one of the two guarantors you should look out for the words “jointly and severally responsible”. These words imply that the lending institution has a choice of coming after both guarantors or only the one who is more solvent. In such cases insisting on joint responsibility is a better option, or better still, make it clear that you stand surety only for a certain sum, which could be 50% of the loan amount or less.

The next logical question would be, “If, as guarantor, I end up paying, how do I recover it from the original borrower?” Well, the law provides for an implied indemnity, which means the original borrower is duty-bound to make good all that you as guarantor were compelled to pay. This can be, in most cases, just a cold comfort as our judicial system is not mercurial enough to provide quick restitution.

To sum up: Neither a borrower nor a lender is, much less a guarantor.

In a lighter vein: A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain. -Robert Frost

Until next week. Stay safe and take good care of your money 🙂Ciao!