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Importance of Inspection of Bank Documents

The Law of evidence plays a pivotal role in the effective functioning of the judicial system. “The existence of substantive rights can only be established by relevant and admissible evidence.” Relevancy of facts is the key to determine the outcome of the judicial process which is based on fair trial without fear or favor and upholding the principles of Natural Justice and Human Rights. Hence the importance of evidence neither be overlooked nor be ignored. The proof of evidence comes out of documents and the establishment of relevant evidence is through the inspection of documents. Hence the documents and inspection of documents are very important and very essential to establish the truth and to bring Justice.

A writing is a document, Section 3; Indian Evidence Act defines evidence as under:

Evidence means and includes-

(a) All statements which the court permits or requires to be made before it by witnesses, in relation to matters of facts under inquiry, such statements are called oral evidence;

(b) All documents including electronic records produced for the inspection of the court; such documents are called documentary evidence.

The following are the bank documents that are important and to be inspected minutely and carefully. As per the settled law and practice for inspection of documents, the documents which are offered for inspection presume that certified copies of the same are made available otherwise there is no evidence of the inspection conducted as well as to prevent any subsequent alteration or modification of the documents.

1. Account opening form.

The contractual obligation between the bank and the customer starts with the opening of the bank account. The account opening form varies depending on the type of account being opened. Hence care should be taken to see whether the correct account opening form is taken to open the account. Account opening form gives all the particulars of the account as mentioned below.

(i) The name of the account.

(ii) The constitution of the account.

(iii) Operational data.

(iv) Addresses of the residence/office/ registered office/ corporate office/ head office/ branches etc depending upon the constitution of the account.

(v) Names of the authorized persons depending on the constitution of the account.

(vi) Details of all instructions given from time to time.

(vii) Compliance with KYC norms.

(viii) The account opening forms should be complete in all respects and filled and signed in the presence of an authorized officer of the bank duly introduced as per banking norms.

(ix) Self attested Pass Port size Photographs of the key responsible authorized persons depending upon the nature and constitution of the account.

(x) Specimen signatures of all key responsible authorized persons.

(xi) Depending upon the constitution of the account, the relevant support documents like Board resolution in case of Private Limited/ Limited companies, Memorandum and Article of Association of the company along with date of Incorporation etc, partnership deed in the case of partnership firm, Trust deed in the case of Trust account etc. All instructions given by the concerned holders of the account from time to time should be recorded in the Bank’s books and account opening form should be updated depending on the changes made, if any.

(xii) Any other formalities as per bank’s requirement.

The details available in the account opening form should tally with the details given in the security documents and also the security documents are executed by the authorized persons as mentioned in the account opening form. Any difference will render the security documents null and void.

2. First application submitted by the applicant borrower.

The original first application for bank facility in the prescribed form of the bank with relevant material papers along with the project report submitted to the bank. The aforesaid documents will give the details of project with all projections along with its technical feasibility and economic viability study from the applicant’s side.

On receiving the application for facility along with the relevant details and project report, the bank undertakes a technical feasibility and economic viability study from the applicant’s side.

3. Bank’s appraisal and assessment report.

On receiving the application for facility along with the relevant details and project report, the bank undertakes a technical feasibility and economic viability study on the project submitted by the borrower and raises many questions to clarify various points related to the project. The borrower gives all clarifications for the points raised by the bank and when the bank is satisfied with all the clarification given by the borrower, and then they sanction the facilities with all terms and conditions. The technical feasibility and economic viability are based on various parameters set for such assessment. Only a competent person who has the technical and financial knowledge about the project appraisal and assessment alone can understand the various intricacies and complexities of such process to understand whether the bank’s appraisal and assessment have been done properly and adequately. Further if there is any difference between the borrower’s assessment and the bank assessment regarding the quantum of finance sought and sanctioned, then the bank has to explain and justify their assessment. Hence the appraisal and assessment made by the bank is an integral part of bank documents and bank cannot take the plea that it is confidential.

The project report consists of two parts namely (i) Term loan assessment to acquire capital goods for the implementation of the project and (ii) working capital for running the unit on a day to day basis. The norms and the assessment methods used are entirely different for term loan and working capital. Hence it is essential to know which of the technical methods and financial aspects the bank has used for their assessment. An inspection of the appraisal and assessment report made by the bank will reveal all aspects of assessment. Hence the importance of submission of such reports by the bank is very important. Besides, based on the assessment made by the bank, they sanction the facilities to suit the needs of the borrower. There are two types of finance namely (i) fund based and (ii) non fund based. Fund based limits involve direct finance and non fund based limits are contingent in nature and the fund is involved only when they are invoked.

4. Terms and conditions of sanction.

Once the assessment is made, the bank sanction the facilities with all their terms and conditions based on which the security documents are taken to legally binding the bank and the borrower. Security documents are taken depending upon the nature of limit and the various legal aspects are to be fulfilled depending upon the constitution of the account. Hence inspection of security documents is very important and any lacuna or omission and commission with regard to the documents may render the documents null and void. In case the bank rejects the proposal, then they have to give valid reasons for rejecting the proposal and if the borrower is not satisfied with the reasons, then they can make a representation to the bank to reconsider their decision. Besides, terms and conditions sometimes may contain onerous clauses which should be deleted.

Yet another important aspect of the inspection is the fact that certain terms and conditions are to be fulfilled even before availing the finance and execution of documents. Some of the terms and conditions are to be fulfilled after execution of the security documents. A proper and effective inspection of documents will reveal whether the terms and conditions are fulfilled as per the terms and conditions of sanction and if any deviation or non implementation of the terms and conditions of sanction will render the documents null and void.

The working capital limits are sanctioned normally for one year and after which a fresh review is undertaken by the bank to appraise and assess the future needs of the borrower. Then fresh application for renewal/enhancement is taken from the borrower with all details required for assessment and the same process of appraisal and assessment is undertaken by the bank before it sanctions fresh/enhanced limits. The new appraisal and assessment reports are also important documents to be inspected. The same process is applicable in the case of fresh term loan also.

5. Bank documentation.

Bank gets the documents executed by the borrower client to create their charge on the documents by which they become the secured creditor. Hence documentation becomes an integral and very important part in the matter of lending. Loan documents vary based on the nature of facility sanctioned to the borrower. Loan documents are to be executed to confine to the terms and conditions of sanction. Any deviation can make the document null and void.

Generally the following are the documents taken by the bank:

a. Demand promissory note.

b. Letter of continuing security.

c. Letter of waiver.

d. Agreement of pledge for pledge of moveable properties.

e. Agreement of hypothecation of goods and book debts.

f. Letter of lien and set off.

g. Personal / corporate guarantee deed.

h. Term loan agreement.

i. Mortgage deed and deed of further charge in case of mortgage.

j. Renewal documents.

k. Letter of negative lien or non encumbrance.

l. Legal scrutiny report from an approved lawyer of the bank regarding the title deeds of the immovable properties like land and building and also the valuation report of all assets on which security interest is created by the bank from an approved evaluator of the bank.

Security interest is created through various bank documents. All loan documents should confine to the terms and conditions of sanction. Hence care should be taken to read and understand the implication of executing the documents. Any discrepancy or any deviation from the terms and conditions should be brought to the notice of the bank and rectified. Any impossible and onerous conditions to be fulfilled must be deleted. Charge creation for loans sanctioned to limited company is mandatory. Documents pertaining to charge creation must confirm to terms and conditions of sanction and the details of company’s immovable properties mortgaged should be incorporated in the document. Lawyer’s legal scrutiny report and the valuation report by an approved evaluator of the immovable properties are very important documents.

6. Important factors relating to documents

While executing any document, a thorough scrutiny of the documents to be executed may be undertaken to avoid any future complication and implication. If proper care is not taken, it may lead to unpleasant consequences. Major important factors are:-

a. The documents should be filled in by hand instead of being typed.

b. The documents should be executed in the presence of bank officials.

c. The documents should be signed in full signature and not by initials. The signature of all the documents signed must be in the same style. A note should be annexed if the signature is made with left hand.

d. The borrower should sign on each page of documents. All cuttings, alterations, erasing, deletion, overwriting etc on the documents should be authenticated under full signature.

e. The documents should be fully filled in and it should be ensured that no blank documents are to be signed.

f. The documents are to be signed and executed by the borrower in the same ink, pen and handwriting in one sitting.

g. The date of the document should be clear and no document should be double dated.

h. If the borrower is an illiterate person or a pardanashin lady or a person signing in vernacular language, the contents of the documents should be explained to him/ her in his / her language and a certificate duly witnessed in this regard should be obtained from him / her. The documents should be got executed with their right hand thumb impression in the presence of the bank official.

i. If a minor is involved, since he is not competent to execute any document, no document is to be allowed to be executed by a minor. However a minor can be admitted and then his guardian has to sign on behalf of the minor.

j. The date on the promissory note and the date on other documents should be the same.

k. The letter of guarantee should be executed in the presence of the bank official.

l. If the borrower is a partnership firm, the partnership deed along with the copy of certificate of registration issued by the registrar of firms may be obtained. All documents should be executed by all partners in their capacity as partners and in their individual capacity. If the partners execute the documents on different dates, then each partner should put the date after their signature.

m. If the borrower is the Hindu Undivided family (HUF), the declaration from Kartha of the HUF should be obtained. All the documents should be got executed by the Kartha and all adult coparceners of the family. The guardians of minor coparceners should also join the documents on behalf of the minor coparceners.

n. If the borrower is a company, the Memorandum and Article of Association of the company may be obtained. All documents should be executed by the authorized official of the company in accordance with the Article of Association of the company. In case of common seal of the company is to be put on the documents, the same should be witnessed by directors or specified officers as per the Article of Association. The Board of Directors of the company has to pass a resolution to obtain bank finance and to execute necessary documents by the authorized officials of the company.

o. The documents should be adequately, correctly and properly stamped where ever necessary.

p. The hypothecation and mortgage deeds where ever taken should be properly filled giving all details of assets in the respective schedules. In the case of limited company, the details given in the deeds should in consistent with form No.8. for such companies, creation of charge, modification, verification and satisfaction are mandatory depending upon the requirements.

q. Insurance cover should be taken for the assets in the joint names of the enterprise and the bank.

r. The bank will have to enter the details of documents taken and the insurance cover obtained in their document register and kept in safe custody.

s. The bank enters all the details in their ledger folio of the account.

t. If any P.A. is given, it should be properly stamped and attested before the Registrar of Assurance/ Notary Public or First Class Magistrate. P.A. should not be time barred and should be in force while executing documents.

7. Credit monitoring by banks.

Yet another important aspect of inspection is whether the bank has followed the credit monitoring system and procedures adopted by them based on RBI guidelines. It may be noted that RBI guidelines are mandatory and any violation of the guidelines can make the claim of the bank null and void.

Credit monitoring is one of the most important functions of bank by which they take timely remedial action in case of any adverse features found in the working of the enterprise they financed. RBI has given many guidelines and devised certain forms and statements to be submitted by the borrowers. Since RBI guidelines and directives are mandatory, any deviation by the banks can land them in trouble.

The basic guidelines are as follows:

a. The supervision, control and monitoring of credit may be divided in to the following categories.

(i) Legal control; Physical Control and Financial Control.

(ii) Off-site and onsite inspection and supervision.

(iii) Off-site supervision by banks.

b. Returns and statements submitted to the bank at the instance of RBI:-

(i) Quarterly Information System (QIS) Forms I, II and III.

(ii) Annual review.

(iii) Monthly Select Operational Data. (MSOD)

(iv) Monthly Stock statement.

(v) Internal control by the banks.

(vi) Statutory audit by external auditors and RBI.

(vii) Stock audit and concurrent audit.

RBI has issued circulars on various aspects of bank finance, credit monitoring, customer grievances, fair practices etc. Some of them are as follows:

(i) Slippage of accounts towards NPA.

(ii) Implementation of interest rates.

(iii) Rehabilitation and multiple rehabilitation of sick units.

(iv) Fair practices code for lenders.

(v) Financing of SMEs.

(vi) Financing of Infrastructure projects.

(viii) Credit monitoring of accounts.

All these documents are also a part of important documents and inspection of such documents will reveal whether the bank has adhered to such instructions by RBI.

8. Besides RBI, Banks Codes and Standards Board of India also has issued guidelines to Banks and financial Institutions regarding the various aspects their lending process and services which are also an integral part of documents to be inspected to verify whether the banks are following the guidelines properly and effectively. Apart from these, the banks themselves have devised their own code of conduct and publish through their websites and Indian Banks Association (IBA) also has framed their guidelines for the banks to follow.

9. All communication exchanged between the bank and the borrowers are all very important documents where it will have its own impact on the proceedings of the Court.

The aforesaid details are the major important documents to be pursued and their inspection plays a vital role to find out any discrepancies, omissions and any mistakes in the executions of documents and also the assessment of financial needs. Further it also helps to know whether effective steps were taken in case of incipient sickness in the industry. Since it is a specialized field, the services of experts can be sought by the competent authorities to verify the veracity of the documents in the interest of justice.

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