Documentation

A major portion of the bank’s fund is employed by way of loans and advances.  lending thus constitutes the main banking business. The business of lending nevertheless is not without certain inherent risks. Largely depending on the borrowed funds, a Banker cannot afford to take undue risks in lending. While so operating a Banker follows certain policy and conduct his business based on well-known principles of sound lending to minimize the risks. In doing so the banker hedges his risk with security and follows the following principles 

• Ideal Security
• Adequate margin
• Proper charge on securities offered
• Proper documentation 

Security has been defined as an encumbrance vested in the creditor over the property of his debtor for securing the recovery of the debt. Anything offered as security to the creditor normally never changes its ownership. It remains in the ownership of the debtor unless some event happens to deprive him of it. An owner of a property offers security as all the legal rights of ownership of that security. When a property is offered as security the debtor transfers certain rights and interests out of his absolute ownership to the creditor. This may include any of the following; 

• Property interest
• Possession
• Neither possession nor ownership but a charge or claim on the property. 

To avail the benefit of ideal security and recourse to law, the bank ensures perfect documentation. Executing any loan involves perfecting the bank security interest in the collateral. A security interest is a legal claim on a property that secures payment on debt or performance of an obligation. Bank interest is said to be perfected where the bank's claim is superior to that of other creditors and borrowers. Documentation means the process of acquiring rights/interests through documents.  It also provides evidence or proof of contract, covenants, rights, and interest. In banks, documentation forms conclusive proof of dealing with the debtor and terms and conditions agreed to by the debtor and creditor. Correct and proper documentation is the most essential factor that enables the banker to avail the benefits of Ideal security accepted by him and the charge created thereon according to the law of the land. Documentation forms a permanent record of the rights and obligations among the parties i.e. the bank, the borrower, and the guarantor if any.  In case of the borrower’s death or the death of the guarantor or co-obligate if any, their legal heirs and successors hold the assets left by him, subject to any charge or liability that they may have created thereon. Nothing is better proof in this regard than the documents that the deceased had executed. it is therefore not only desirable but also essential that the bank officials should be fully conversant with the law and practice on the subject. If at any time the filing of a lawsuit against the borrower and the guarantor becomes necessary, the court may not pass a decree if the documents are defective or fractious and Bank may lose the case. 

Selection of proper document 

The terms and conditions of the advance and covenants between the borrower and the bank are contained in the documents. Each term and condition agreed upon must therefore be clearly defined and unambiguous. The documents must be drafted in a technical language commonly adopted for the purpose. Many technical terms have specific judicial interpretations and the Bank treads on safe ground while using such terms instead of its own which might be interpreted in a sense different from what was intended. Bank may have developed a variety of standard forms and agreements for documentation purposes. 

Authority

The executants of documents must be competent to contract as per law.  A minor, a lunatic, or an insolvent has no contractual capacity. A company cannot transgress or overstep the powers which it may have under its memorandum of association. All acts done by the company beyond its powers would be ultra-virus and the company is not legally binding. In case documents are executed by an attorney on behalf of his principal, the original power of attorney needs to the examined to ensure that it has been properly executed and that it confers the requisite powers on the attorney to execute the documents and bind the principal. The powers to execute the document may not be accompanied by the powers to borrow or pledge securities. Such power should be specifically contained in the power of attorney. In the case of companies, a resolution authorizing the directors to borrow and authorizing them to executive documents are two separate things as borrowing may not include the execution of documents. The documents executed by the companies must bear the official seal of the company.  In the case of firms document must be signed by all partners and also in their individual/personal capacity. 

Stamp duty 

After having decided on the documents which have to be executed by the borrower, the bank should ensure that they bear the correct stamps where applicable. in case of doubt in Bank legal advisor/counsel should be consulted. An instrument not duly stamped will be inadmissible as evidence. It must be remembered that an unstamped or insufficiently stamped is an invalid document abinitio and cannot be admitted as evidence even on payment of duty and penalty. A lawsuit based on such documents will therefore fail in law. 

Covenants and contents of documents 

The contents of the documents must contain the correct particulars of parties, proper recitals, a detailed description of security, if any, to be charged the consideration, amounts, terms of repayment, and positive and negative covenants. 

Witnessing 

Some documents are required to be compulsorily witnessed others do not. A mortgage deed,  a gift deed, and a sales deed of immovable property or a will are required to be attested by two witnesses. Attestation must follow execution, and not precedes it. 

Registration 

Under the law some documents are required to be registered other do not. Documents that require registration must be got registered to make documents enforceable and conclusive proof of perfection.