Documentation: An Overview

Documentation: An Overview (Jaiib Paper 1, Module B, Unit 16)

Dear bankers,

As we all know that  is Documentation for JAIIB Exam. JAIIB exam conducted twice in a year. So, here we are providing the Credit cards, Documentation (Unit-16),FUNCTIONS OF BANKS (Module B), Principle & Practice of Banking JAIIB Paper-1.

♦Documentation

Documentation is one of the vital areas in the credit Portfolio of a Bank. The purpose of taking documents are to fix the terms and conditions between the bankers and the borrowers, to identify the borrowers, to identify the securities, to count the period of limitation, to resort to legal remedies in case of need and so on.

◊Need for Documents

  • The Documents are necessary to be procured for the following reasons:-
  • To identify the borrower
  • To identify the security
  • To have a written evidence of the transactions of lending made by the bank
  • To ensure due repayment of the legal step for recovery of the loan, in the event of non- payment by the borrower or guarantor.

◊Different types of Documents

  • Demand Promissory Notes (DPN)
  • Agreements
  • Forms

Demand Promissory Notes (DPN): Where no specification for a fixed period for the repayment of loan is given, the bankers take the DPN. In DPN, the borrower makes a promise to the banker to repay the loan amount on demand with agreed rate of interest. The form of DNP should be in conformity with section 4 of the Negotiable Instruments Act, 1881. The form of a DPN varies normally to suit the situation such as fixed rate of interest, floating rate of interest, single borrower, joint borrowers etc.

As per section 35 of the Indian stamp act, if a DPN is unstamped or under stamped, the defect cannot be rectified even by paying a penalty.

Agreement: The form of an agreement should be in conformity with the Indian Contract Act. The terms and conditions are set out in the agreement. The amount of loan, rate of interest, rate of penal interest, percentage of margin, period of repayment, right of the bankers, in case of default of loan, details of security charged are included agreement. The agreement attract a stamp duty as per Indian Stamp Act.

Forms: Forms are not in the nature of promise or agreement. These are obtained to specify clearly the intention of the borrower.

◊Documentation Procedure

  • Selection of Correct Set of Documents:
  • Stamping: Section 12 of Indian Stamp Act provides for cancellation of adhesive stamp so that the same cannot be used again.
  • Amount of Duty: In a case Promissory Note, Bill of Ex-change, share Transfer, Receipt, letter of credit, Policy of Insurance, are under stamped in terms of the amendment of sec 35 of Indian Stamp Act.
  • Filling
  • Execution
  • Legal Formalities
  • Keeping Documents Valid (in force)

♦Revival of time barred debts

  • Any contract that is executed by an executant without for any consideration is void in the eyes of law. As per section 25 (3) of the Contract Act, a fresh promise made for repaying the time barred debt is a valid consideration and the same is enforceable in a court of law. Therefore, it is possible to revive a time barred debt by obtaining a fresh express promissory note from the borrower(s) and Guarantor(s)   promising to repay the time-barred dues.

The essential ingredient of section 25(3) of Indian Contract Act is that  the creditor claims the amount of debt subject to the conditions.

  • The promise must be written and signed by the promisor or his agent generally or specially authorized in that behalf.
  • The promise may be to pay the whole or part of the debt and the debt must be which the creditor would have enforced for payment but for the law of limitation.

The difference between section 18 of limitation act and section 25(3) of contract act is that under the former act, an acknowledgement obtained from the party before the expiry of the period of limitation would extends the validity period of the document for further period of 3 years, whereas a promise made under section 25(3) to pay debt after the expiry of limitation period, should be an express and not implied promise. Normal practice by the bankers is to obtain a fresh DPN (or set of documents) along with a letter signed by the promisor or his/her authorized agent to pay the time barred dues.

♦Stamping of Documents

The Indian Stamp Act 1899, contains provisions regarding instruments chargeable with duty, mode of using stamps, time of stamping instruments etc.

  • Section 17: All instruments chargeable with duty and executed by any person in India shall be stamped before or at the time of execution.
  • Section 18: Every instrument, other than a bill of exchange and promissory note, which are chargeable with duty and executed out of India may be stamped within three months after it has been first received in India.
  • Section 19: First holder in India, of any bill of exchange payable otherwise than on demand on promissory note drawn or made out of India shall affix there to the proper stamp and cancel the same before he presents the same for acceptance or payment or endorses of transfers or otherwise negotiates the same in India.
  • Section 35: The act provide that any person shall not admit an instrument, not duty stamped in evidence for any purpose.

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