Precautions to be taken while executing loan documents :

The following are the precautions, in nutshell, which should be taken care of both by the borrower as well as banker, at the time of preparation, execution and registration of loan documents etc.:

(a) Person, executing the loan documents must be competent to enter into a contract i.e., he or she should have contractual capacity. Thus, minor, insolvent person, lunatic etc. are not competent persons to execute documents.

(b) The loan documents should bear proper type of stamps i.e. adhesive, embossed etc. Further value of stamp duty should be adequate, keeping in view the laws of the State in which the documents are executed. The Non Judicial Stamp papers, if used, should bear the date, prior to its execution and also the date should not be earlier than six months. The text of the agreement may be written on the Stamp papers itself and plain papers (additional sheets) may be used, if required in addition to Stamp papers.

(c) No column of the loan documents should be left blank. While executing the documents, the borrower must sign in full and in the same flow in which his signatures are available in the bank. The cuttings & over writings must be avoided and if at all, they become unavoidable, they should be authenticated by the borrowers by signing in full.

(d) Sometimes the borrower does not understand the language of the loan documents. In such a case, a separate letter, in the language of the borrower should be taken from him stating that the contents of the loan documents have been explained to him and well understood by him, including the terms and conditions of the loan sanctioned. The letter should be got witnessed by another person.

(e) In the case of an illiterate borrower who puts his thumb impression on the loan documents, the bank official in whose presence the documents are executed, should give a certificate on a separate paper that the contents have been fully explained to the borrower in a language which he speaks and understands. This certificate should be got witnessed by independent persons.

(f) Similarly, in case of a blind person, such a certificate should be obtained from lawyer or notary public in whose presence the borrower executes documents.

(g) In case the borrowers reside at different places, the loan documents should be got executed through the branches of the bank situated at those stations, after properly verifying the identity of the borrowers.

(h) As regards stamp duty, it should be according to the state which attracts highest value of stamp duty. The borrowers while signing the documents must put date and place of execution after their signatures.

(i) In the case of a partnership firm where a minor is admitted as partner to the benefits of partnership, he should not be allowed to execute any loan document. This is so because a creditor i.e. lending banker cannot proceed against the minor in person. However, minor’s share in the firm can be proceeded against, as the major partners of the firm have executed loan documents, thereby binding each other by their act of execution. After the minor attains majority and elects to remain as partner in the firm, the bank should proceed to obtain an undertaking from him stating that he (minor attaining majority) stands fully liable for the dues of the bank against the partnership firm.

(j) Sometimes loan documents are executed by the holder of power of Attorney on behalf of a trading concern, partnership firm, Hindu undivided family (HUF), company, individual etc. In such a case, a notice should be sent to the principal, stating that the attorney has executed the documents on their behalf. A certified copy of Power of Attorney should be kept along with main loan documents. And also the letter/confirmation received from the principal in this regard, in response to the notice should be preserved.

(k) The borrowers must obtain a copy of the sanction and ensure that documents only for those facilities which are sanctioned in their favour are executed.

(l) All the documents must be completely filled in before their execution.

(m) The guarantee form should be executed if so agreed and stipulated as a term of sanction.

(n) Copies of all the documents executed must be obtained and kept on record for any future reference.