Loan documentation is one of the vital areas in the credit portfolio of a bank. The purpose of taking documents is to fix the terms and conditions between the bankers and the borrowers, to identify the borrowers, to identify the securities, to count the period of limitation, to resort to legal remedies in case of need, and so on.
Generally, the documents required to processing the loan application are almost similar across all the banks, however, they may differ with various banks depending upon specific requirements, etc.
Important Steps of Loan Documentation Process
For a document to be error-free and proper, the steps to be followed are:
1. Selection of Correct Set of Documents
Documentation varies depending upon the nature of the facility may not be used for a term loan facility.
Similarly, a document meant for an individual borrower cannot be used for a company or partnership borrower.
As the bankers have pre-printed forms of documents, it should be ensured that the correct set of documents, which are relevant for the particular facility and borrower are used.
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2. Stamping
The next aspect of documentation is tamping. A document shall be stamped in accordance with the Indian stamp act as amended by the concerned state governments.
Indian stamp act contains provisions regarding the time of stamping for an instrument executed in India and out of India.
A document executed in India shall be stamped before or at the time of execution. Section 12 of the Indian stamp act provided for the cancellation of the adhesive step so that the same cannot be used again.
Any instrument bearing an adhesive stamp which has not been canceled, so that it cannot be used again, shall be deemed to be unstamped.
3. Filling
The next aspect of the documentation procedure is filling. As bankers are generally using the pre-printed formats of documents with blanks sanction of the credit facility before execution.
Once the document is executed it becomes a concluded contract and any subsequent filling by the bank without the consent of the executant will invalidate it.
The document is completed shall be filled with the same ink, in some handwriting by the same person in a single sitting.
Otherwise, it may give rise to a suspicion that the document is filed, subsequent to the execution.
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4. Execution
After filling, the next step in the documentation procedure is the execution or signing of the document.
It should be ensured that the signature in the document tallies with the signature as appearing in the application for the loan and also with the specimen signature, in case the party maintains a deposit account with the bank.
In case of execution in the representative capacity of sole proprietor or partner or director or agent or trustee or executor to the minor borrower for his necessity, the signature of the guardian is to be obtained for sale and as guardian of the minor borrower.
Normally, bankers take the signature of the execution in all the pages of the documentation, so that he (executant) may not argue in future, that the contents of the pages were not known to him.
In case the document contains any alteration, overwriting, or cutting, it must be authenticated with the full signature of the executant.
The documents shall be executed in the presence of bank officials and the fact of execution of documents with the date and time of execution, the details of documents executed, the fact of having to explain the contents of the documents in the language known to the executant shall be recorded in a register with the signature of two bank officials so that in case of any dispute regarding the execution of documents, this register may be produced as evidence before appropriate authority,
5. Legal Formalities
In some cases, after the execution of the document, certain legal formalities are required to be undergone.
For example, in case of advances to limited companies against its assets, the required forms are to be presented to the registrar of companies with the thirty days from the date of execution.
Similarly, in the case of the creation of registered mortgages, the mortgage deed is presented for registration before the registrar of assurances within four months from the date of execution of the deed.
If these formalities are not observed then the bank may have to lose priority over the security.
The documents may be admissible as evidence before the competent authority.
6. Keeping Documents Alive
The documents taken by banks for a credit facility do not have perpetual life. The provisions of limitation act apply to them.
The limitation act prescribes the period of limitation for different types of documents.
For example, the period of limitation for a DPN is three years from the date of execution. If a loan is not repaid within the period of limitation, then the bank has to get fresh documents for extending the period of limitation as per the provisions of limitation act.
As per section 18 of the act, when the borrower acknowledges the debt before the expiry of period of limitation, then the life of the document is extended by one more period from the date of sucb=h acknowledgment.
As per section 19 of the act, if the borrower or his authorized agent makes any part of payment towards the loan before the expiry of a period of limitations, then the period of limitation is extended by one more period from the date of such part payment. Government Loan Schemes for Small Businesses in India.
7. Renewal of Documents
At the time of renewal or variation within the limit, the bank should obtain a fresh set of documents or continue the existing set of documents duly supported by supplemental/additional deeds if required.
Cancellation of the existing set of documents would cause a discontinuity in the bank’s charge on the security for the credit facility.
It is mandatory to obtain fresh sets of documents for the renewal of the credit facility.
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A formal letter to the borrower agreeing to continue the credit facility by the bank for a further period of say, one year, at his request would suffice.
Acknowledgment of the debt and security incorporating particulars o the original security document duly signed by the borrower are obtained, at the time of renewal and attached to form part of the original set of documents.
8. The Revival of Time-Barred Debts
When time-barred debts are to be revived, the recourse may be to subsection 3 of section 25 of the contract act 1872.
This section provides that a promise made in writing and signed by the person to be charged therewith, or by his agent, generally especially authorized in that behalf, to pay wholly or in part, debt, of which the creditor might have enforced payment but for the law of limitation of suits, is not void for want of consideration.
A statement made by a witness in court, admitting a time-barred debt, does not constitute a promise to pay within the meaning of section 25(3), it is implied a promise, would not be sufficient for this purpose.
9. Safekeeping and Preservation fo Documents
Nowadays banks give loans fora longer period say 20 years or even 25 years.
Until such tie the entire dues are recovered, the documents are to be preserved in good condition.
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