Banking · Collateral and Securities
Which of the following statements correctly distinguishes between a legally binding guarantee and a moral obligation in banking?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Under the law, a 'Guarantee' is a form of personal collateral where the liability of the guarantor is secondary to that of the principal debtor, and the bank must exhaust all remedies against the debtor first.
- 2'Comfort Letters' are frequently issued by parent companies for their subsidiaries' loans but, unlike a formal guarantee, they are often legally unenforceable 'moral obligations'.✓
- 3Both guarantees and letters of comfort create an absolute 'Fiduciary Relationship' where any default automatically results in prosecution for 'Criminal Breach of Trust'.
- 4A guarantee requires the registration of a charge on the 'Vahan' portal, whereas a moral obligation or comfort letter is registered with CERSAI.
Correct answer
'Comfort Letters' are frequently issued by parent companies for their subsidiaries' loans but, unlike a formal guarantee, they are often legally unenforceable 'moral obligations'.
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