Page 115 - A Banker Down the Rabbit Hole

34. The most misunderstood fact -

The liability of a guarantor

Case of misrepresentation of facts to a proposed
guarantor

The episode of pitiable position of guarantor reminds me of another loan
case where a guarantor of substantial worth was offered. We had a
proposal for a working capital limit for Rs 2 crore against security of steel
products for trading in a famous "Iron Market" of a metro city. The charge
on security was "Hypothecation" that meant an agreement that the
borrower would have the ownership of the goods but would keep them
in trust for the bank, deal with them as per trade requirements of buying,
selling and replenishing the goods as part of his trading activity. The
borrower also agreed as per contract to deliver the possession of goods
to the bank as and when bank wanted, in case of default.

The trading loans are much riskier than manufacturing and hence some
additional tangible security of the borrower or the guarantor of
commensurate market value was insisted. The borrower firm offered to
mortgage a commercial property worth Rs. 3 crore belonging to the
guarantor. We visited the site of the under construction property. I
enquired from some persons in the vicinity of the property as to who
was the owner, the stated purpose of the building under construction
etc. I approached one person working nearby and asked, "Do you know
for what purpose the building under construction will be used and who
was the owner?" The gentle man replied, "Seems you are from a bank.
The property belongs to Mrs. Sushma Goela and a restaurant is almost
ready." How he could guess that we are form a bank, was a big question
for me. I got alerted as it seemed the man was tutored in anticipation of
our visit.

112 | A Banker down the Rabbit Hole