Types of Borrowers
Relevent for JAIIB PPB | CAIIB ABM | CCP Module A
Why It Matters in Branch:
Before sanctioning any loan, you must know who you are lending to and what their legal capacity is. An advance to a minor or an unauthorised partner can be irrecoverable.
SHORT NOTES
The legal capacity of the borrower determines the bank’s ability to recover the loan. Different entities have different legal standings:
INDIVIDUALS
- Major (18+ years): Full contractual capacity. Can borrow in own name.
- Minor (below 18): Cannot enter valid contracts. Loans to minors are void. Guardians can borrow on behalf of minor — loan is against guardian’s name, not minor’s.
- Married Woman: Full contractual capacity. Separate legal entity from husband.
- Pardanashin Woman: Special protection — must ensure she understands the document she signs. Independent legal advice recommended.
- Illiterate Person: Must affix thumb impression in presence of witness. Bank must explain terms.
ENTITIES
- Proprietorship: Owner and firm are same person legally. Owner has unlimited liability.
- Partnership Firm: All partners jointly and severally liable. Check Partnership Deed carefully. Verify authority to borrow — not all partners may have authority.
- Limited Company (Private/Public): Separate legal entity. Borrowing capacity defined by Memorandum of Association. Board resolution required. Check object clause — can company borrow for this purpose?
- Hindu Undivided Family (HUF): Karta manages the family. Karta can borrow for family business. Co-parceners are also liable.
- Statutory Bodies / Government Companies: Borrowing powers defined by statute. Check enabling provisions.
- Limited Liability Partnership (LLP): Registered with MCA. Liability of partners limited to contribution. Designated partner signs loan documents.
KEY RULE: Always check if the borrower has legal capacity to contract AND authority to borrow before processing any credit facility.
BRANCH CONTEXT
✦ In branch, the most common mistake is accepting loan applications without checking authority. A partner walking in to avail a loan for the firm — we must check the partnership deed to confirm he has borrowing authority. We must ensure right partners execute the documents as well to enforce any legal action if the loan goes bad.
