This article is to equip bank staff with a practical, compliance-oriented understanding of loan documentation, ensuring creation of legally valid, enforceable, and error-free loan documents.
1. What is Loan Documentation?
Loan documentation refers to the systematic process of obtaining, executing, and preserving documents strictly in accordance with sanction terms, applicable laws, and regulatory requirements.
Proper documentation:
* Creates a legally enforceable charge over securities
* Establishes the rights and obligations of the bank, borrower, and guarantor
* Enables the bank to defend its interest in courts of law
* Clearly identifies the borrower, guarantor, facility, and security
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2. Components of Loan Documents
Loan documents include:
* Loan application submitted by the borrower
* Sanction letter and written acceptance by borrower and guarantor
* Loan and security agreements
* Demand Promissory Notes (DPNs) and continuity letters (where applicable)
* Guarantee agreements
* Mortgage deeds / Memorandum of Title Deeds
* Ancillary declarations, undertakings, and confirmations
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3. Importance of Proper Execution
Accurate execution is the foundation of enforceability. Even a well-drafted document loses value if execution is defective, improperly stamped, or signed by an incompetent person.
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4. Key Compliance Checklist at the Time of Execution
A. Sanction & Acceptance
* Sanction terms must be communicated in writing
* Written acceptance obtained from borrower and guarantor
* Acceptance forms an integral part of documentation
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B. Stamping & Stamp Duty
* Documents must be stamped before or at the time of execution
* Execution date cannot precede stamp paper date
* Stamp duty varies by State – ensure correct State duty
* Excess duty, if applicable, to be paid where the executant resides
* One stamp paper = one instrument only
* Impressed stamps must appear on the face of the instrument
* Multiple stamp sheets must contain writing on each sheet
* Stamp paper must be purchased in the name of executing parties only
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C. Signing & Filling of Documents
* Executants must read documents before signing
* Full signature on all pages – no initials
* All overwriting, cuttings, and interlineations must be authenticated
* Same pen and ink to be used throughout printed stamped forms
* If blanks are filled by others, obtain executant’s signature near the entry
* Place, date, month, and year of execution must be clearly mentioned
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D. Capacity & Competence of Executants
Ensure executants are:
* Major and of sound mind
* Not under intoxication
* Not minors, lunatics, or undischarged insolvents
Special cases:
* Married woman: liability limited to her independent estate unless husband undertakes liability
* Illiterate / vernacular signatory:
* Thumb impression marked as LTI / RTI
* Mandatory certificate confirming contents were read and explained
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E. Execution Control
* Documents must be executed in presence of authorised bank officer
* No documents to be sent outside branch for signature
* Execution should take place in one sitting
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5. Entity-Specific Documentation Guidelines
Sole Proprietorship
* Documents to be executed with property stamp (representative capacity)
Partnership Firms
* All partners to sign OR authority letter from absent partners
* Personal guarantees of all major partners recommended
* No guardian signature for minors admitted to benefits
Companies
* Verify Board Resolution authorising execution
* Documents signed only by authorised signatories
* Common seal to be affixed only if required by Articles
* Names of persons present during affixation to be recorded
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6. Mortgage & Security Documentation
In case of property mortgage, ensure:
* Properly stamped mortgage deed / memorandum
* Registration fee receipt attached (if registered)
* Title deed boundaries match mortgage deed
* Encumbrance Certificate for last 13 years
* Latest property tax receipts
* Deposit of all original title deeds
* Legal opinion and valuation reports on record
* Proper handling of second charge / pari-passu charge / NOCs
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7. Special Compliance Requirements
* Running accounts: DPN + Letter of Continuity
* Loan accounts: No continuity letter required
* Documents executed outside India:
* Must be stamped within 3 months of receipt in India
* Registration of mortgage:
* To be completed within 4 months of execution
* Company charges:
* Mandatory ROC registration within 30 days under Section 77, Companies Act, 2013
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8. Limitation & Post-Documentation Controls
* Revival letters to be obtained before 36 months
* Balance confirmation from borrowers and guarantors:
* Preferably half-yearly
* Second-level scrutiny by another knowledgeable officer
* Preserve documents neatly in identifiable folders
* Ensure no blanks or pencil entries before safe custody
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9. Staff Responsibility – Key Takeaway
> *A defect in documentation today may result in total recovery failure tomorrow.*
Meticulous execution, verification, and preservation of loan documents are non-negotiable responsibilities of every banker involved in credit operations.
Below article covers a one-page, ready-to-use compliance checklist designed for branch staff and operations teams, aligned with Indian banking practice and suitable for Loan Dcumentation officer to review, and finalize loan agreements, amendments, and ancillary documents.
LOAN DOCUMENTATION – CONCISE, READY-TO-USE BANK STAFF CHECKLIST
Disclaimer
This article is intended for staff training and educational purposes only and does not constitute legal advice. Readers should refer to the Limitation Act, 1963, Stamp Acts, Companies Act, 2013, and relevant judicial precedents for case-specific guidance.
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