EXECUTION OF LOAN DOCUMENTS: THE MANAGER MUST REMEMBER THESE 29 IMPORTANT POINTS

The main concern of a bank is that security available to it should be good enough to fall back upon, in the event of adverse circumstances. The role of loan documentation in the bank is to establish a legal relationship between the lender and the borrower when the dispute goes to a court of law. Thus, the execution of a loan is important to bankers to ensure that the document held by them is properly stamped, properly filled in,  executed in relation to specific security and nature of security, and having a record of the date and place where the document is executed.

How to devote your time to the execution of documents?

The borrowers/guarantors shall execute the documents in the presence of the Bank Manager or authorised official of the bank. The officer-in-charge of documentation in banks must be thoroughly conversant with the type of securities and legal nature of charges to be created. In the cases of large borrowal accounts, banks take the services of the experienced advocate of the bank’s panel for the purpose of documentation and also the executed documents to be vetted by the advocate or law officer of the bank. Hence devote your time to the execution of documents and ensure perfection in the following matters.

1.  The documents should not be given to borrowers for obtaining signature/s from other borrowers or guarantors.
2.  The documents should be executed in one sitting.
3. The executor (borrower/guarantor) should read the content of documents prior to execution.
4. The executor (borrower/guarantor) should sign in full on all the documents and not by initials.
5.  The cutting, overwriting, and interlineations must be authenticated under the full signature of the executants/s.
6.  While filling in the blank space of a printed form of stamped paper, use the same pen till the end of the form. Different colour ink used to fill in the same form gives rise to the suspicion that  the blank column was filled up later on without the knowledge of the executant, which is bad in law.
7. While filling in printed forms, as an abundant precaution, the executant’s signature shall be taken wherever blank space is filled in by the others.  Subsequently, the executant cannot later on dispute that the form was filled in later on.
8. Where a borrower is an illiterate person, a left-hand thumb impression of the borrower should be obtained. There is no need to attest to the thumb impression. However if the borrower is an illiterate pardanishin lady or a person signing in a vernacular language, it is necessary to have a certificate stating that the contents were read and explained to the executants and that he or she executed the same of his/her own free will after understanding the sanction terms and without any coercion. 
9. Sanction terms and conditions shall be conveyed to borrowers in writing and acceptance of sanction terms and conditions should be obtained from them. Proper documents complete in all respect according to the nature of the facility should be obtained.
10.  A minor is incapable of entering into the agreement and any agreement entered with a minor is void as per the Indian contract act. However, in some partnership firms, a minor might have been admitted as a partner of the firm. Bankers must remember that such a minor is admitted to the benefits of the partnership and they cannot execute the loan documents. Hence guardian’s signature should not be taken in loan documents on behalf of the minor.
11. Proper care should be taken that only authorized signatories have executed the documents. A sole proprietor should execute the documents with a property stamp (representative capacity).
12. In the case of a partnership, the documents should be signed by all the partners or a letter of authority should be obtained from absent partners in favour of selected partners to execute the documents. It is necessary to obtain personal guarantees from all major partners in their individual capacities. Whenever a limited company is a partner; the authority of the person signing on behalf of the company should be verified.
13.  In the case of Limited companies, the execution of documents should be as per the stipulation contained in the resolution. The resolution passed in the meeting of the board of directors should also clearly specify who would execute the documents on its behalf. Documents executed by the company should be affixed with a common seal only if it is required under the common seal clause in the Articles of Association of the company. If a common seal is required to be affixed, then the board resolution should contain the names of the Directors and Officers in whose presence the seal is to be affixed.
14.  Stamp duty varies from state to state; proper stamp duty as applicable to the state where the document is executed shall be paid.
15. Any instrument chargeable with stamp duty executed out of India must be stamped within 3 months after it has been first received in India.

In the case of mortgage of properties

16.  The mortgage deed shall be executed on stamp paper of adequate value.

17.  If a memorandum of mortgage or mortgage deed itself is registered, the receipt of the registration fee paid should also be attached to the mortgage deed.

18. Boundaries and areas shown in the title deed should be in conformity with the mortgage deed.

19. Encumbrance certificates traced for the last 13 years should be held.

20. Up-to-date property tax paid receipts should be properly held.

21.  All the original title deeds and other relevant documents as per legal opinion should be deposited in the bank.

22. Authorized persons only to create mortgages.

23.  Record of dates to be observed in case of a second charge, pari-passu charge, and NOCs should be obtained properly from the first charge holder.

24. Valuation of Properties & legal opinion should keep along with mortgage documents.

25. Revival letters from borrowers and guarantors should be taken before the expiry of thirty-six months from the date of the demand promissory note.

26. Confirmation of balance is to be obtained from borrowers and guarantors normally on a half-yearly basis. 

27. Attestation of documents

Attestation means witnessing the execution of a document that is required to be attested under law. In case of documents like the assignment of LIC policies, one witness is required and in case of the mortgage deed, there should be two witnesses. Some documents like demand promissory notes need not be attested. The executants are the party to the deed and they should not be attesting persons. The attesting person need not know the contents of the document.

28. Registration with Registrar of Companies (ROC): In the case of limited companies, charges on the company’s assets like hypothecation of stocks and machinery, book debts, mortgages, etc shall be recorded with ROC within 30 days of execution of documents in terms of Sec.125 of the Companies Act. The registration should be done with the Registrar of Companies under whose jurisdiction the company’s Registered Office is situated.

29. Last but not least, have a second look at the documents executed before keeping them inside the safe.

The authorized official of the bank shall verify whether the document is duly stamped before or at the time of execution of the document. For example, a Demand Promissory Note (pro-note) which is executed without a proper revenue stamp or is under-stamped, cannot be admitted in evidence even by paying a penalty. The revenue stamps affixed on the document should be effectively canceled at the time of execution. The best way of canceling of revenue stamp is by signing over all the stamps in such a manner that the signature extends even beyond the stamps. Bankers have to remember that the document properly filled in and complete in all respects saves them when a dispute goes to court. Hence, once the entire document is obtained, it is always better to have a second look at the document obtained, preferably by another official who is conversant with the type of securities and legal nature of the charge to be created.  Once the execution of documents is completed it has to be kept neatly in a separate cover or folder in an identifiable manner.   Yet, it is always advisable to check once again whether something is entered on the document in pencil or left blank before keeping it in the safe.  The mistakes if any noticed shall be rectified then and there. In most cases, the borrower does not cooperate at a later stage and it may not be possible to rectify the mistakes.

ARTICLE FROM BANKING SCHOOL