A mid-sized logistics company, 'Swift Movers Private Limited,' has been a client of your bank for five years with a flawless repayment track record. The company currently has a Term Loan of 5 crore for its fleet and a Cash Credit limit of 2 crore for operational expenses. The company approaches the bank for an additional 3 crore to set up a new cold-storage facility. The directors offer their personal bungalow, valued at 10 crore, as collateral. However, a recent credit report shows that one of the directors has stood as a personal guarantor for a defaulted loan in another bank. The company's current ratio is 1.2, and its Debt-Equity ratio is 2.5. The bank must evaluate this proposal based on the principles of lending and the risk profile of the borrower. Based on the scenario, what is the most significant risk factor the bank should consider before sanctioning the new facility?

Question

Accepted Answer

The director's guarantee in a defaulted loan elsewhere indicates a potential character risk and could lead to the account being classified as a 'connected exposure' or under-stress asset.

Answer

The bank should ignore the director's outside guarantee because the company itself has a clean track record with the current bank.

Answer

The current ratio of 1.2 is excellent and indicates that the company has no liquidity issues for the next five years.

Answer

The high value of the collateral bungalow ensures that the principle of safety is met, and the loan should be approved immediately.

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