Technology and development go hand in hand, which in turn leads to evolution. However, despite significant technological developments over the past few decades, in certain arenas the approach remains conservative, or at least wary.
For example, taking any kind of loan brings to mind the extensive paperwork involved, the personal visits to complete the documentation and the hurried signatures on contracts. The question to be asked is “Why?” Hasn’t technology developed enough to make such transactions paperless or is the “wary” approach defeating the purpose of technology?
In the world of technology, especially in the e-commerce arena, where human interaction is kept to a minimum and most transactions are done on a “shrink wrap” basis, there is a need to explore whether retail loans (which are pretty much streamlined) can also be encased in a fully digitized environment. While some banks, non-banking financial companies and other financial institutions have adopted technology for the initial scrutiny process, we have yet to come across a scenario where the end-to-end process is all facilitated through an online platform.
This column focuses on the feasibility, legality and execution of electronic loan documents, from an Indian banking perspective.
Electronic contracts are still at a nascent stage in India. While the Indian Contract Act, 1872, neither provides for nor prohibits electronic contracts, the Information Technology Act, 2000 (IT Act), specifically provides for the validity of electronic contracts.
However, some contracts cannot be executed electronically under the IT Act as it specifically excludes certain documents from its purview, such as powers of attorney, negotiable instruments (other than cheques), and any contract for the sale or conveyance of immovable property or any interest in such property, which could include any mortgage document. Consequently, any e-platform conceived for the purpose of secured loan transactions would need to exclude one important leg, i.e. mortgage documents.
With respect to electronically signing a document, the IT Act recognizes only such electronic signatures which have been approved by the central government. Currently, only two electronic signatures are recognized: digital signatures (mainly used for signing corporate forms and income tax returns), which can be obtained from a certifying authority; and signatures verified by the e-authentication technique provided by “Aadhaar e-KYC services”, for uses such as self-attestation, e-filing of tax, financial sector account opening and application for certificates (birth, caste, marriage).
Any e-platform that is implemented for retail loans would largely use Aaadhar-linked authentication unless the government recognizes another efficacious mechanism.
The Indian Evidence Act, 1872, was amended in 2000, to provide for evidentiary value of electronic records and documents, and raises certain presumptions with respect to recognition of electronic agreements and signatures. However, while physically signed documents can be admitted as primary evidence, section 65B sets out a detailed process for electronic documents (printed from a computer) being admitted as evidence, to ensure the authenticity of such documents.
So far, Indian courts have taken a favourable view of electronic evidence. The Supreme Court, in Anvar PV v PK Basheer (2014) stated that “there is a revolution in the way the evidence is produced before the court. Properly guided, it makes the systems function faster and more effective”. Courts have also upheld an e-auction process conducted by banks for sale of the borrower’s secured assets, and the validity of an e-mail communication acknowledging a debt, for the purpose of the Limitation Act, 1963.
However, the aspect of payment of stamp duty presents an interesting challenge in respect of such e-platforms. While execution of an electronic contract would attract stamp duty, the current laws are silent on the mechanism for such payment.
Whether the above issues are real deterrents to the migration of retail loan transactions to an e-platform is something that needs to be evaluated. However, since we are moving towards an environment where customers feel at ease while transacting business online, lenders may find it worth their while to explore this option, given that the legislative framework has so far not been discouraging.
In the given scheme of things, lenders may consider moving towards an end-to-end digitized platform and formulate comprehensive internal policies setting out detailed processes and procedures, including suitable data protection norms.
When the market has the problem of plenty and customers are spoilt for choice, an online platform may give a significant competitive edge to the participating lenders.
SNG & Partners has offices in Delhi, Mumbai, Singapore and Doha. Nupur Singh is a partner and Devyani Dhawan is a principal associate