Documentation for Bank Loans

Group: I6

Documentation• Documents are to be furnished with the bank while

application of loan.• Submission of documents is done in accordance with the

nature of credit facility, security offered and category of borrower.

• Documents drafted, signed, executed and stamped for the necessities of the loan is “Documentation”.

• In simple words: “The documents required by the bank for disbursement of loans”

Purpose of Documentation1. Establishes identity of the borrower.2. T&C are written down to prevent misunderstanding on a

future date.3. Defines the borrowers liability to repay loan on demand or

otherwise.4. Creates charge on assets of borrowers providing security

against which loan is guaranteed.5. Specific mode of creating a charge and resultant rights and

liabilities of parties.6. In case of default, documents serve purpose of evidence.

Types of Documents

1. Demand promissory notes:• Borrower agrees to pay loan amount + interest on demand of

the lender. • It is not applicable for term loans• In case of partnership, promissory note has to be signed by all

the partners jointly and also individually

2. Letter of Continuing Security: Banker makes the borrower liable for the debit balance and to avoid application of Clayton’s rule.– Example: Overdrafts, Cash credit facilities

Clayton’s Rule: Payments towards a running account, such as a bank account, are applied to the earliest debt first. Thus, the most recently incurred charge is the last charge that will be paid off.

Reference: Devaynes v. Noble (1816) 1 Merivale 529, the case after which the rule is named.

3. Letter of Waiver:By signing letter of waiver, the borrower waives his right to insist that the Demand Promissory note signed by him be presented before him, to claim its payment.

4. Agreement of Pledge:Borrower obtains a credit facility by pledging the goods and other movable assets.The banker, in case of default, sells the goods to recover the amount without intervention of the court.

5. Agreement of Hypothecation:Borrower’s duty in case of goods, vehicles etc.Borrower undertakes not to create any charge on hypothecated goods without taking consent of bank in writing

6. Letters of Lien and Set-Off:The borrower authorizes the banker to exercise right to lien and right to set-off on possession of securities and credit balance in borrower’s account respectively.

7. Personal Guarantee:Security to the loan in terms of collateral. Thus personal liability to repay the loan in case of borrowing firm.

8. Term Loan Agreement:Includes repayment schedule and may also contain negative covenants.

9. Mortgage Deed:Loan is secured by mortgage of immovable assets through Mortgage deed registered with Registrar of Assurances.

10. Letter of Negative Lien:Borrower undertakes not to create any lien on specified assets in favor of another lender or creditor assuring the banker against any charge of a 3rd party.

Other Documents:Blank Transfer Deed – While advances against shares, debentureLetter of Appropriation – Appropriate amount of fixed deposit towards payment of loan as in when required.Letter of Assignment – To insurance company asking for assignment of insurance policy in favor of banker.Letter of Undertaking – Premium on insurance policy payment.Loan Agreement – T&C of loan and undertaking of borrower.Valuation Certificate – Against Gold loans.

Stamp Duty

Indian Stamp Act requires instruments to be properly stamped.Types:1. Adhesive Revenue Stamps (ARS)2. Embossed Stamps / Special ARS 3. Non- Judicial Stamps4. Bills of Exchange Stamps

Execution

• Execution means document has been properly written, read, understood and signed by executants.

• For illiterates, the person drafted should explain the contents to executant and get his consent.

Attestation

• Document carries signature of witnessed for any purpose such as identification.

• Documents that need attestation:1. Deed of mortgage2. Will3. Deed of Gift4. Mortgage of Ship

Registration

Documents of which registration is compulsory has to follow the Section 17 norms of The Registration Act 1908

Effect of Non-Registration

Unregistered Documents shall not:1. Affect any immovable property specified 2. Confer any power to adopt3. Be received as evidence of any transaction affecting such

property or conferring such power.