Vinu: Hey Manu, I have a question. If a customer stands as a guarantor for a loan in another bank, what would be the implications when they’re applying for a new advance from us? The loan for which they’re a guarantor is regular.

Manu: Good question, Vinu. Even though the loan they stood guarantor for is regular, it still has some implications on the new advance. As a guarantor, the customer is effectively taking on the responsibility to repay that loan if the original borrower defaults. This creates a potential liability for them.

Vinu: So, even if the loan is regular, we still need to consider it?

Manu: Yes, absolutely. While the loan is regular now, the guarantor’s future financial obligations could increase if the borrower defaults. So, when we assess the customer’s creditworthiness for the new advance, we’ll have to factor in the guarantor role and consider it as a contingent liability.

Vinu: How exactly would this impact the approval process for the new advance?

Manu: Well, we’d need to evaluate the customer’s overall financial position more carefully. The bank might reduce the loan amount we’re willing to sanction, or we may require additional collateral. Also, we’ll check their Debt-to-Income (DTI) ratio and assess their capacity to handle both the new loan and the potential liability from the guaranteed loan.

Vinu: So, standing as a guarantor could limit the loan amount we sanction or increase the scrutiny?

Manu: Exactly. Even if the borrower for the other loan is paying on time, we can’t ignore the risk. If things go south, the guarantor might end up shouldering that debt, and we have to make sure they can handle both obligations.

Vinu: Makes sense. So, would we also need to ask for extra documents or disclosures?

Manu: Definitely. We’d ask for details of the loan for which they’re a guarantor, including repayment history and terms. We’ll also assess their current income, assets, and liabilities to get a complete picture before proceeding with the new advance.

Vinu: Got it, Manu. Thanks for explaining how standing as a guarantor could affect a new loan application!

Manu: Always happy to help, Vinu!