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LawyersclubindiaArticle:Documentationagainstloanandadvances

Documentationagainstloanandadvances
Documentisawrittenstatementoffactsandaprooforevidenceofexistenceofaparticulartransaction
betweenpartiesinvolvedthereto,tobeanswerable/liableonplacementbeforeaCourtofLawfor
satisfactionofthechargescreatedtherein.

Importance of Documentation: Completion of required documentation formalities as per approved


sanction letter before disbursement of a loan is necessary to protect the interest of the bank from any
distress situation and also necessary for acknowledgement of the debt by the borrower. Correct
documentation enables the banker to take legal recourse against the defaulting borrowers. The bankers
deal with other peoples money which are repayable on demand. Naturally, the bankers prime
considerationisthesafetyandliquidityoftheirdepositorsmoney.Incaseoftheborrowersinabilityto
repaytheloanthebankermusthavesomealternativetangibleassetsoftheborrowertofallbackuponto
recovertheloan.Thebanker,therefore,triestocreatesomesortofachargeonanyotherassetsofthe
borrower in his favour. Such charge makes the asset charged available to the banker when needed in
satisfactionoftheadvancesmadetohim.Hereinliestheroleandimportanceplayedbydifferenttypesof
securitiesinloansandadvancesofaBank.

TYPESOFDOCUMENTS:

Documents related to securing loans and advances are classified into the following two categories (a)
ChargeDocuments,and(b)LegalDocuments:

a)ChargedocumentsarepreformattedandprintedformsprovidedbytheBanktotheclientfor
executiontocreatechargeonthesecuritiesagainstloansandadvances.

b) Legal Documents are legal papers provided by the client certifying the legal status of the
borrower,borrowingpower,titletogoodsandproperty,legaldeedsandpowerofattorneyrelated
tocreationofchargeonsecurities.

PARTSOFDOCUMENTATION:

Apparentlytherearethreepartsindocumentation,namely:

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LawyersclubindiaArticle:Documentationagainstloanandadvances

Obtaininginstruments/Documents.
Stamping.
ExecutionandRegistration.

EXECUTIONOFDOCUMENTS:

Documentstobeexecuted(signed)bythepartiesconcernedcompetenttodosoeitherinofficialcapacity
orinpersonalcapacityasthecasemaybe.Insomecasessuchdocumentsarerequiredtobeexecutedin
presenceofwitness.

Thefollowingprecautionsaretobetakenatthetimeofexecutionofdocuments:

a)DocumentstobefilledinandareexecutedinthepresenceoftheManageroranauthorised
officeroftheBank.Hemustputhisinitialinpencilsothatinfutureitcanbeascertainedin
whosepresencethedocumentswereexecuted.HemayhavetodeposeinaCourtinfuture.

b)TheclientshouldsigninaccordancewiththespecimensignaturerecordedwiththeBank.

c)Ifdocumentsconsistofmorethanonepage,allthepagesaretobesignedbytheexecutantsatthe
endoftheformandalsoattheendofthescheduleofsecurities.

d)Mentionofdateandplaceofexecutioninadocumentismandatory.

e)Alldocumentsmustbedulyfilledinbeforeexecution.Documentsshouldnotbekeptblank
exceptoneextrasetofPromissoryNoteandLetterofContinuity.
f)Thereshouldnotbeanycutting,overwriting,insertion,cancellation,oralterationinany
document.Ifanysuchthinghappens,itistobeauthenticatedbyalltheexecutantsundertheir
recordedsignatures.

g)Afterexecution/Registrationofdocuments,theseshouldbeenteredintotheRegister(Safe
custodyRegisterforLoanDocuments)dulyscrutinizedandinitialedbyanauthorizedofficerof
theBank.
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LawyersclubindiaArticle:Documentationagainstloanandadvances

h)LoanDisbursementofCreditfacilityshouldnotbeallowedbeforecompletionofdocumentation
formalities.

ReleaseofSecurities:

No securities are to be returned to the borrower without approval of two authorised signatories one of
whichmustbeeitherManagerorManager(Operations).

BANKERSRIGHTOFGENERALLIEN:

Lienistherightofacreditortoretaingoods/securitiesbelongingtothedebtor,tillthedebtispaid.Lien
holderisinpossessionofthegoodsorsecuritiesbutitdoesnotgivehimthepowerofsaleunlesssucha
rightisexpresslyconferredbythestatute.Thisispossessorylien.

Possessorylienisoftwokings:a)ParticularLien&(b)GeneralLien.

a) ParticularLien: A particular lien is attached to some specific goods. It is a right to retain


possessionoverparticulargoodsinconnectionwithwhichthedebtarose.

b)GeneralLien:GeneralLienmeanstherighttoretainallthegoodsofanotherinthepossession
of the person until all the claims of the possessor are satisfied. It entitles a person to retain
possessionofgoodsbelongingtoanothernotonlyforaparticularchargebutalsoforageneral
balanceoftheaccount.

NOAGREEMENTFORCREATIONOFLIENNECESSARY:

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LawyersclubindiaArticle:Documentationagainstloanandadvances

Noagreementisnecessarytocreatetherightoflien,forunderthelaw,suchanagreementisimpliedby
thetermsofSection171oftheContractAct,1872solongasthesameisnotexpresslyexcluded.But
bankssometimestakealetteroflientoavoidfuturedispute.Inorderthatthelienshouldarise(a)the
property must come into the hands of the banker in his capacity as a banker, (b) there should be no
entrustmentforaspecialpurposeinconsistentwiththelien(c)thepossessionofthepropertymustbe
lawfullyobtainedinhiscapacityasabanker(d)thereshouldbenoagreementinconsistentwiththelien

Negative Lien This is an undertaking from the borrower that during currency of the loan, the
assets/goodsdepositedagainsttheloanshallnotbechargedinanymannerwithoutthebankspermission.

WHY BANKERS LIEN IS TREATED AS IMPLIED PLEDGE ? WHAT IS THE RIGHT OF


BANKERONTHEGOODSPLACEDUNDERHISPLEDGE?

BankersareentitledtoGeneralLienbutitalsogoesastepfurthertorealisethesecurityofhiscustomer
in case of default. Bankers lien is equal to implied pledge and can sell the security after reasonable
noticetothedebtorprovidedthepropertycomesintothehandsofthebankerintheordinarycourseof
business. The right of lien can be exercised on goods or other securities standing in the name of the
borrower only and not jointly with others. However, the bankers right of lien is not applicable to the
following properties of the customer viz. Safe custody deposits, bills of exchange or other documents
entrustedforspecialpurposeetc.

WHY IT IS SO IMPORTANT TO OBTAIN ACCEPTANCE FROM THE WORK ISSUING


AUTHORITY REGARDING CLIENTS ASSIGNMENT OF BILLS IN FAVOUR OF THE
BANK?

ItissoimportanttoobtainanacceptancefromtheWorkIssuingAuthorityregardingclientsassignment
ofbillsinfavourofthebankbecauseonassignmentonanyproperty,theassigneegetsabsolutecontrol
overit.

GIVEINSTANCESOFATLESTTWOCASESOFCREDITFACILITIESWHERED.P.NOTE
ISNOTOBTAINED?
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a)LetterofCredit(L/C)
b)LetterofGuarantee.

LAWOFLIMITATION:

The period of limitation for filing a suit for the recovery of money, lent under D.P. Note against the
securitiespledged/hypothecatedis3yearsfromthedateofexecutionofthedocument.Evenincaseof
temporaryODthesuitmustbefiledwithin3yearsfromthedateoftheOD.Todeterminetheperiodof
limitation,thecasesmaybecategorisedasfollows:

Wheredemandforrepaymentisnecessary.
Wheredemandforrepaymentisnotnecessary(i.e.incaseofadvanceswhereD.P.Noteshave
beenobtained).

a)Inthefirstcasetheperiodoflimitationdoesnotbegintorununtildemandhasbeendulymade.
b)Inthesecondcase,theperiodoflimitationbeginstorunfromthedateofthedebt(i.e.fromthe
dateofborrowing/thedateofexecutionofD.P.Noteanddocuments).

Theperiodoflimitationwithinwhichasuitforrecoveryoftheloans/advanceslies,istheordinaryperiod
of3(three)yearsfromthedateonwhichtheadvancewasmade:

a)Incasewheretheadvanceismadeforafixedperiod,thelimitationperiodof3yearsbeginsto
runfromthedateofexpiryofthefixedperiod.
b) For term loans payable in instalments, the limitation period is 3 years for each instalments,
startingontheduedateofeachsuchinstalments.
c)Thelimitationperiodformortgageis12yearsbeginningonthedateofthemortgagedeed.This
isapplicableonlyforenforcingpersonalliabilityoftheborrower,thesuitmustbefiledwithin3
yearsfromthedateofrepaymentoftheTermLoanorthedateofmortgagedeed.

Generally, the bank takes equitable mortgage and in order to obtain a decree against the borrower
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personally(asforexample,forattachinghisotherproperties),thesuitmustbefiledwithin3yearsofthe
dateoftheadvance.

Forextendingthevalidityofthepronoteforfurtheryears,thefollowingproceduresaretobefollowed:

a)Alettertobeobtainedfromtheborrower(s)acknowledgingtheliabilitybeforetheexpiryofthe
limitationperiodofthreeyearsonthebasisofthepronotetakenearlier
b) Confirmation over appropriate Revenue Stamps of the balance of a particular date (Balance
confirmation)
c)Partpaymentofinterestorprincipal,providedthedepositslipissignedbytheborrower(makerof
thePronote)
d)Afreshpronotedulysignedbytheborrower(s).
e)Ifpartpaymentismadebychequebeforeexpiryofthelimitationperiod,thelimitationperiodis
extendedforafurtherperiodof3yearsfromthedatewhenthechequewastenderedandthedebt
does not get time barred even if the cheque is cashed after the expiry of limitations. But if the
chequeisdishonoured,theperiodoflimitationwillnotbeextended,butsuchdishonouredcheque
willgiveafreshcauseofactionagainsttheborrower.

PRIMARYANDCOLLATERALSECURITIES:

The securities tangible or intangible, that the banker advances against directly are treated as Primary
Securities i.e. those securities are primary ones on the basis and valuation of which the advances are
allowed.Incaseofacleanadvancetheborrowerspersonalsecuritybecomestheprimarysecurity.

Collateral securities are obtained in addition to the primary securities to improve the overall security
positionoftheadvancesandagainstwhichnodrawingisallowed.Acollateralsecuritymaybeobtained
fromtheborrowerorfromathirdpartybywayofguaranteeaccompaniedwiththeguarantorstangible
securitiesasarrangedfor.

MORTGAGE:

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Amortgageisthetransferofaninterestinspecificimmovablepropertyasasecurityforrepaymentofa
debt.ThebankerisusuallyconcernedwithEnglishmortgageorequitablemortgageorregisteredorlegal
mortgageforthepurposeofmakingadvanceswheretheownershipofthepropertyistransferredtohe
mortgageebyregistrationofthemortgagedeed.

Normally, the possession of the property remains with the mortgagor who has a right to redeem the
propertyonpaymentoftheoutstandingadvances.

Anofficerresponsibleforcompletionofdocumentationmustlookintothefollowing:

a)RegisteredMortgage:

BeforeexecutionofmortgagedeedeitherequitableorregisteredclearancefromtheBanksLegal
Adviser/Retainer must be obtained that the property documents are in order and the mortgagor
has the right title over the property with draft deed duly authenticated by the Legal
Adviser/Retainer.

Incaseofleaseholdproperty,permissionfromtheappropriateauthoritymustbeobtainedfor
executionofmortgagedeedinfavouroftheBank.

AfterexecutionofmortgagedeedinfavouroftheBankintheofficeoftheSubRegistrar,officer
concernedmustensurethattheDeliveryReceiptofthemortgagedeedhasbeendulydischarged
(mustagreewiththesignaturegivenbythemortgagorinthemortgagedeed)bythemortgagor
otherwise it will be difficult to collect the original mortgage deed from the SubRegistrars
Office.

PLEDGE:

Pledge means bailment or delivery of goods or documents of title to goods by the borrower to the
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creditorwiththeintentionofcreatingachargethereonassecurityfordebt.Theownershipremainswith
thepledgersubjecttocertaininterestsofthepledgeeinthesecurityconcerned.Inapledgethedebtor
customerdeliversthepossessionofthesecuritiestothebankerandthebankerholdsthepossessionof
securitiesuntilthedebtisdischarged.

This is the essence of a pledge which is a bailment of movable property by one person to another to
secure repayment of the securities is held by the banker (pledgee) the ownership thereof lies with the
debtor(pledger)whoisentitledtoreturnofthesameuponrepaymentofthedebtincludinginterestand
otherexpenses.Ifthedebtremainsunpaidthebankerhasarightofsaleofthesecuritiesandcanexercise
thispowerwithorwithoutrecoursetothecourtaftergivingapropernoticetothepledger.

Generally,goods,producesandothermerchandisesofbulkynaturearestoredintheborrowersgodown.
Othersecuritiesnamelystockexchangesecuritiesarestoredinthebanksownstrongroom.Wherever
the pledged securities are stored, the banker has to keep them under his lock and key and to maintain
watchandward.Also,thesecuritiesarerequiredtobeadequatelycoveredbyinsuranceagainstfireand
R.S.D.risks.

All pledges should be accompanied by pledge letters or memorandum of deposits duly signed by the
pledger.Thepledgerneeddulyreceiptalldeliveriesmadebythebanker.

HYPOTHECATION:

Mortgage of movable property is called hypothecation. The securities remain in possession of the
borrowerandareonlyequitablychargedtothebankerunderdocumentsexecutedbyhim.Theparticulars
ofthe securities and their quantities are declaredby the borrowerthrough periodicalstatementsonthe
basisofwhichthedrawingsareregulatedbythebanker.

VALUATIONOFSECURITIES:

Thevaluationoftheprimarysecuritiesaremadebythebankerconservativelyandrealisticallysothatat
anytimetheforcedsalevalueofthesecuritiesdoesnotfallbelowtheoutstandingadvance.Itisusually
done on the basis of the average ruling market prices of the securities and in case of imported goods,
rulingmarketpricesorlandedcostwhicheverislower.
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WHATISAMARGINAGAINSTLOANSANDADVANCES?HOWDOESITDIFFERFROM
DRAWINGPOWER?

Marginmeansthedifferencebetweenthevalueofthesecurities/goodsandtheamountuptowhichthe
borrower is allowed to draw. The difference between the market value of the pledged/hypothecated
goods to secure a loan/advance and the amount of the loan/advance (normally the drawing power) is
known as MARGIN. The value of the securities in excess of the bankers advances is called the
borrowers Margin. Margin is obtained against loans and advances to cover the loss of value of the
stockofgoodsduetopricefluctuation,aswellasaccruedinterestontheoutstandingloans.

DrawingPower(D.P.)meansthevalueofsecurities/goodslessmargin.Drawingpoweristheamountof
advance which the client can draw from the bank against the sanctioned limit out of the total value of
stockpledged/hypothecatedwhilethemarginistheportionofthevalueofstockpledged/hypothecated
which is retained by the bank by way of deduction from the total value of stocks at the agreed
percentage.

Md.NahidAbsarEmon

Source:selfpreparedinaccordancewiththeprevailinglawsofBangladesh.

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