Loan documentation: Possible deviations and precautions for banks
Loan sanction doesn't mean disbursal of loan. As per banking norms, it is desired that no sanctioned loan is disbursed without documentation and compliance of sanction terms. Documentation establishes and declares bank's legal rights on obligors--the borrower, guarantor, mortgagor and also on the security against a particular loan or advance. As such, a loan which is made to a borrower with due diligence, integrity and supported by perfect documentation comes back to the bank with the least trouble or difficulty.
Though there is an axiom that 'bankers deal with documents', it is also evident from the past banking scams that many loans are constituted on forged or defective documents. Banking sector has been sustaining scandalous stains of such default loans facilitated by manipulated or fraudulent documentation. Documentation discrepancy may also take place thanks to lack of applying due diligence or willful heedlessness of the banker. But whatever the reason may be, the ailing bank has to give an extreme price for it.
In general, documentation deviation majorly occurs due to the inexperience, overlooking and carelessness of the banker or willful non-adherence to the terms & covenants of sanction letter and credit guidelines of CRM and Bangladesh Bank. Loan sanction/approval letter is the contract between the bank and borrower and comprises the amount, purpose, pricing, tenure, mode of repayment, security, documentation and the terms and covenants of sanction. It is also the 'do's and don'ts' of actions to take, or not take for both the borrower and banker. But many branch managers and credit administration officers don't read out the sanction letter thoroughly and thus leave many terms and covenants ignored and many documentations undone. And, for such noncompliance lending bank has to encounter many obstacles to recovery in case the loan defaults.
Documentation lapses may start from the very beginning of the loan sanction process- (i) irresponsible preparation of proposal such as incomplete address and contact details of the borrower, mortgagor and guarantor; (ii) all addresses-business/professional, permanent and present not recorded; (iii) name of father, mother, spouse of the borrower, mortgagor and guarantor not found; (iv) location (with road link or site map) and schedule of the mortgage properties not noted detailed; (v) presenting wrong and manipulated financials of the borrower; (vi) verbal or telephonic information not recorded; (vii) documents obtained partially or not properly filed or filed in irrelevant file.
Documentation deviation can also continue while disbursing the loan- (i) disbursement without documentation; (ii) disbursement with partial or improper documentation (charge documents left blank or unstamped); (iii) all undertakings and charge documents not obtained; (iv) in many cases personal guarantee, letter of consent and other documents, if any, are not executed by the spouse/guarantor/mortgagor in presence of the banker.
Instead, these are handed over to the borrower in good faith to get these signed by the spouse/guarantor/mortgagor concerned at home, which has every chance of signature forgery.
Documentation lapses continue even after disbursement- (i) periodic trade license, e-TIN clearance certificate, rent payment receipt, municipal/holding tax receipt, etc not obtained or obtained but not checked against the existing ones; (ii) periodic balance confirmation not obtained from the borrower; (iii) periodic stock report not obtained; (iv) year-end financials not obtained; (v) documents not preserved in safe custody under lock and key.
In case of lending against registered mortgage, many bankers, in good faith, completely rely on bank's legal adviser from obtaining legal opinion to preparation of mortgage deed & irrevocable power of attorney deed and registration thereof with concerned sub-registry office. They are used to copying the schedule of mortgage properties exactly as it is mentioned in the legal opinion of the legal adviser. But there might have many basic errors, omissions and mismatch in area of land, plot number, khatian number, boundary of land, etc which are not noticed by the banker and thus erroneous deeds get registered rendering the bank's credit at a risk.
Thanks to bankers' too much dependence on the lawyer and lack of understanding and tallying the documents, in many cases, title deeds are obtained photocopy or certified copy without registration receipts. Due to not obtaining up-to-date rent receipt the land already sold or transferred to others is mortgaged to the bank. Signboard of encumbrance is not ensured on the mortgage properties and businesses being financed. As a result, one business is financed concurrently by multiple banks and one property is mortgaged to multiple banks.
Since documentation is the proof of lending, it should be carefully and properly completed as per sanction terms. This will also increase the chance to recover the loan in time and prevent it from being defaulted. Many common bankers have a misconception that documentation starts after the loan is sanctioned. But prudent bankers start it from the very beginning of the loan proposal and keep it continuing even after disbursement. Because, once you squeezed out the toothpaste from the tube, it will be harder to put it back into the tube again.
For a loan a banker has to obtain five types of documents- (i) documents of individual identity (NID, photographs, utility bill etc) of borrower, his spouse, mortgagor and guarantor; (ii) documents of business or profession, i.e., trade license, e-TIN, BIN, VAT certificate, ERC, IRC, rent deed, visiting card, bank statement, financials, salary certificate etc depending on the nature of business or profession; (iii) documents of borrowing status (CIB report, loan sanction letter, loan account statement); (iv) documents of collateral security, i.e, fixed deposit receipt, cheque, mortgage property documents (khatians, bia deeds, title deed, mutation khatian with DCR, rent payment receipt, non-encumbrance certificate, legal opinion); and (v) documents of charge, i.e, charge documents, mortgage deed, irrevocable power of attorney deed etc.
Responsibility of loan documents preparation shouldn't be vested on the bank's legal adviser alone. Banker as a credit analyst must have a clear concept and understanding of all loan documents, especially of the mortgage properties. As soon as the banker receives the legal opinion from the legal adviser, he should go through it judiciously and crosscheck it with the all original papers of mortgage properties. If any clerical or typing mistakes of any basic information are found in lawyer's opinion; or, if any mismatch is noticed among the deeds and khatians regarding schedule and ownership, the matter must be communicated to bank's concerned lawyer sending back the opinion to the lawyer for possible rectification and clarification.
At one stage before finalising legal opinion, genuineness of the title of the mortgage properties must be physically searched and checked with the District Record Room Section, District Registrar Office, Sub-registrar Office, Tahsil Office and AC (Land) Office by the manager or responsible credit officer in association with bank's legal adviser or by any enlisted third-party survey company to avoid any hassle in future.
After obtaining finalised legal opinion, mortgage property is to be assessed by bank's enlisted surveyor or authorized engineer. Valuation report has to be accepted if schedule and other ownership particulars are in line with legal opinion. While preparing a branch valuation certificate, correct schedule and particulars of mortgage property should be clearly mentioned as per finalized legal opinion. For big loans, the proposed mortgage properties can be advertised in national dailies inviting claim, if any, of any other party.
The above documentations have to be ensured before sanction. After sanction advice is received from Credit Risk Management (CRM) Division, it should be crosschecked with branch provided particulars. If any mismatch is found, CRM Division has to be communicated the same immediately to get the necessary corrections.
After preparing Mortgage & Irrevocable Power of Attorney deeds through the Legal Adviser, their draft copies have to be obtained and checked by the banker to ascertain whether there is any error or omission in the deeds. After being satisfied, the deeds to be printed and registered in due course. After registration, the registration receipts to be obtained and duly discharged by the mortgagor. Certified copies of Mortgage & Irrevocable Power of Attorney deeds have to be obtained immediately after the registration.
Banker has to be cautious that all documents in connection with the advance are obtained and every document is correctly drafted, properly executed by the borrower and guarantors and duly stamped & registered (where applicable) according to the law to safeguard the bank's interest. After completion of all documentation formalities, a letter of satisfaction has to be obtained from the legal adviser regarding completion of documentation. In many cases branch itself prepares the satisfaction certificate and then gets it signed by the lawyer. As a result the purpose of this certificate is not served.
In addition to obtaining all original papers & documents of mortgage properties, banker should try to obtain at least photocopies of Title Deed, Mutation Parcha, DCR & up to date rent receipt of other personal properties owned by borrower, spouse, mortgagor and guarantors so that these properties can also be attached while filing money suit if the borrower defaults. It should be followed in case of collateral free loan also. In addition to personal guarantees, bankers also obtain post-dated security cheques with a memorandum of deposit of the same from the borrower.
After disbursing the loan, safe custody and periodic updating of documents must be ensured by the banker. Safe-in and safe-out register and sequential checklist of loan documents will ensure discipline and order of documents and will facilitate faster search of documents in loan files. Register of uncollected original deeds (title, Mortgage & Irrevocable Power of Attorney deeds) has to be maintained and periodic communication with the SRO has to be maintained for collection of original deeds by surrendering the registration receipts.
Finally it is to say, the above lapses and precautions are least, not the all about loan documentation. Documentation nature and extent may vary and get widened from bank to bank. But whatever may be nature and extent of documentation, a banker has to bear always in mind-- "compromising with documentation means compromising with recovery of a loan". So a banker has to be meticulous and adherent to documentation as per sanction terms to ensure a germ-free sound health and a smoother recovery of a loan.
The writer is banker