“Did this person personally borrow thousands of crores?”

When analysing a company's financial health, don't look only at debt. Check “Guarantees Given” too.

First of all, we need to understand the difference between borrowing money and guaranteeing someone else's borrowing.

Then, what Is a Personal Guarantee?

For instance, an organisation needs 100 crore as a loan from a bank. Consequently, banks evaluate the organisation's financial position and ask for collateral for loan approval. In this situation, if the company does not have appropriate collateral, then the promoter gives a guarantee to pay off the entire debt on behalf of the organisation if it fails. Hence, a personal guarantee provides another additional benefit: additional security to the bank to get its loan back.

The Subhash Chandra Case: Why the Distinction Matters

In the case of Dr Subhash Chandra, this is happening, which is a trending financial issue in the Indian banking system. In 2024, the National Company Law Tribunal filed an insolvency case against Subhash Chandra, as he failed to repay the loans of India Bulls Housing Finance.

The Annual Report Section Most Investors Ignore

In most of the cases, investors fail to identify the difference between borrowing and guarantees given, which differentiate the debt amount if it is actual or inflated. In this case, investors need to focus on guarantee terms during evaluation of annual reports.

The reason behind personal guarantee:

●      Supporting a subsidiary

●      Supporting a group company

●      Improving access to credit

●      Supporting business expansion

Then, please ask these five questions before analysing a financial report or annual report:

1. Who received the loan?

2. How much is guaranteed?

3. What is the financial health of the borrower?

4. What are the terms of the guarantee?

5. Can the guarantor realistically absorb the liability?