Security vis-a-vis Collateral security/personal guarantee vis-à-vis third party guarantee
Credit Guarantee Schemes for Banks (CGS-I) Credit Guarantee Schemes for Banks (CGS-I)
1. What is the difference between primary security and collateral security?
Primary security is the asset created out of the credit facility extended to the borrower and / or which are directly associated with the business / project of the borrower for which the credit facility has been extended. Collateral security is any other security offered for the said credit facility. For example, hypothecation of jewellery, mortgage of house, etc.Example: Land, Plant & Machinery or any other business property in the name of a proprietor or unit, if unencumbered, can be taken as primary security.
2. Under the Scheme, any third party guarantee obtained for the credit facilities will make them ineligible for guarantee cover. What is third party guarantee?
As per the extent guidelines no third party guarantee should be obtained if the account is to be covered under the Credit Guarantee Scheme. However, in case the constitution of the borrower is proprietary or partnership, the personal guarantee of proprietor/ partner is not treated as third party guarantee. Similarly, Personal guarantee of directors, where borrower constitution is a company will not be treated as third party guarantee. Personal guarantee of spouse, friend etc. will be treated as third party guarantee.