Collateral and third party Guarantees
A guarantee or collateral does not influent the performance of the borrower.
In practice bank enable them to be a security feature in their risk calculation and reduce regulatory capital requirement.
Security or backing for a loan can be arrange in the following form
Loan collateral: Loan collateral is borrower’s asset that will be transfer to the lender in case borrower can’t maintain their obligation.
Guarantee: Guarantee is the third-party that assumes the liability of the borrow in event of default, or in form of credit insurant , or credit protection such as a credit derivative contract.
Liquidity line: Liquidity line is a line of credit that arrange by the borrower which can drawn on in the event of financial difficulty of the borrower