(Contributed by Ajay Kumar Jhingan, Trainer – Banking & Finance)

Ajay Kumar Jhingan, our member and International Speaker/Trainer in Corporate and Retail Banking, is preparing his new course in Global Risk Academy - the Course on Drafting of Loan Documentation (Basics).  The idea came after many questions and requests from his students both in live trainings that he facilitates and in online course The Fundamentals of Credit analytics that he recently delivered for Global Risk Academy.  

In this article he explains the importance of acquiring basic knowledge and strong foundations of Loan Documentation for reducing credit and regulatory risk.


8028244484?profile=originalThe loan document or any other document plays a very important role for banks. This is because the documents create an evidence for having entered into a transaction or transactions between two parties or among many parties involved into a transaction.


You will appreciate that banks deal in documents & create documentary evidence.  If you talk of stocks, banks do not store the same at their end but create an evidence by way of means of financing for which they enter into an agreement with their clients. The system is so appreciable that it is purely based on policy of give & take.  Question arises how?


If you open an account with a bank, you may have to sign application for opening account which the bank will give you upon your visit or online request and along with it you may have to complete other formalities as per norms for giving the same to bank. Banks will open your account & give you passbook & debit card in return or if you tender an application for credit card, you will be given credit card by bank as per norms.  If you are interested in cheque book facility, you will give application for issue of cheque book & cheque book will be given to you by bank as per your request.


Likewise, if you want loan, bank will give you application of loan & checklist for completion of other formalities. If you complete the application submission process, you may be given loan as per banks policy or if not given loan, at least a letter declining your proposal as per norms.


Same way, if you insert debit or credit card into an ATM machine to withdraw money or deliver a completed & signed cheque at bank’s cash counter, you will be given money as per your request.


You must have observed that in this entire process, dealing is only based on giving & taking of documents which are by way of process of documentation on a piece of paper or papers. It is important to understand, that giving a cheque is a request on a piece of paper & delivery of money is also by way of paper currency which is a legal tender in exchange. If you request online transfer, you are given immediate debit and credit to relevant accounts online only & instantly. Again, if you deposit cash, you have to deliver pay in slip with cash for written amount and banks give you acknowledgement of cash deposited.


It does not mean that document formalities are completed by writing request letter and signing necessary document and giving delivery to your banker to close transaction but such transactions whether by way of dealing in documents (any type or may be currency in exchange) or through computer online, all such documentary evidence is subject to check by way of audit or inspection through internal & external auditors to find out various types of discrepancies for correction. If checking through audit or inspection is not there, it may create many serious issues even leading to denting on banks business & create financial or any other type of associated risk. Though inspection of loan documents is a subsequent process viz. after execution of documents but risks may be originated right from day one when document is created.


So to keep the documents and records ready and free of mistakes, the daily verification & tallying system at banks work regularly and plays a bigger role. Not only so, the documents and all accounts are subject to daily self-audit also. Discrepancies of any nature are given a very deliberate thought to keep things in order & according to compliance rules.


When it is so, still many things transpire when court cases happen or frauds take place and provide derivations/observations/discrepancies with a serious concern leading the banks to frame their various policies and modify existing ones which are circulated every now & then as a part of internal process. And also it helps to strengthen their inspection mechanism in such a manner that risk is mitigated.


What is needed is knowledge, zeal, enthusiasm, drive and utmost care with due diligence that should lead us to know the important aspects of document & documentation. Probability of things going normal always is never cent percent because an element of abnormality is always there. For a layman, there is no difference between document & documentation but for a professional, the terms are quite different & have deep meanings.


It is in this pretext & that since lot of importance is attached to documents, the Course on Drafting of Loan Documentation is designed in such a simplified manner that will enrich your basic knowledge. Remember that basic knowledge is meant to create strong foundation whereas other aspects are taken care with vigilance, alertness & experience.

When you learn to drive a car, you are building your basic knowledge & confidence to handle serious situations when on road. Other driving skills like those of smart drivers are automatically generated by virtue of experience in driving on roads just for a year or so.

You know well if you violate traffic rules, you will be served with a ticket by Transport Inspector. Hence you are taking lot of care. If one does not start with basics or does not initiate to make strong foundation, one may lack in many other important aspects leading to serious impacts.


Hence, that time is always the best time when one decide to start. So decide to start now because it is YOU.

Join  the Course on Drafting of Loan Documentation (Basics) 

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