Governing Indian Law & Statutory Authority
Quick answer
A loan agreement records the amount advanced, the interest, the repayment schedule, the security or guarantee if any, the events of default and the dispute resolution mechanism. It is an ordinary commercial instrument and is not in the First Schedule to the Information Technology Act, 2000, so it can be signed with Aadhaar-based eSign and stamped with an e-stamp certificate before or at the time of execution. A promissory note is a different instrument, and whether it can be signed electronically now depends on who holds it. A demand promissory note issued in favour of, or endorsed by, an entity regulated by the RBI, NHB, SEBI, IRDAI or PFRDA falls outside the First Schedule exclusion and can be executed electronically. A promissory note between private individuals remains inside the exclusion and is executed on stamp paper with a wet signature. Many private lenders are better served by a loan agreement, or by a loan agreement and a separate security document, than by a promissory note alone.
Most private lending in India is documented badly. Money moves on a bank transfer, the terms are agreed over a call, and the only written trace is a WhatsApp message. Months later, when repayment stops, the lender discovers that the difficulty is not the borrower's willingness but the absence of evidence: nothing fixes the amount, the rate, the schedule or the date from which the money was due. A loan agreement is the instrument that fixes all of that. It is an ordinary commercial agreement between lender and borrower, and it is a different instrument from a promissory note. That distinction now has a practical consequence that most commentary has not caught up with, because the position changed in 2022. A promissory note is a negotiable instrument, and negotiable instruments other than cheques sit in the First Schedule to the Information Technology Act, 2000, which places them wholly outside the Act. A 2022 notification narrowed that entry so that a demand promissory note issued in favour of, or endorsed by, an entity regulated by the Reserve Bank of India, the National Housing Bank, SEBI, IRDAI or PFRDA is no longer excluded. A private promissory note between two individuals still is. So the line runs like this: a loan agreement can be e-signed in either case; a demand promissory note in favour of a bank or NBFC can now be e-signed; and a promissory note between private individuals is still executed on stamp paper with a wet signature. This guide covers when to use which, what the agreement must contain to be recoverable, the stamp and limitation position, and how the agreement is completed online.
Quick answer
- 01State the amount, the rate, the schedule and the default interest expressly, not by reference to a conversation.
- 02A loan agreement is not a promissory note, and the difference affects whether the document can be executed online.
- 03A demand promissory note in favour of a regulated financial entity can now be e-signed; a private one cannot.
- 04Stamp duty applies by instrument category and by state, and must be paid before or at execution.
- 05The limitation period for recovering money lent is three years, running from the date the money became payable.
- 06A written acknowledgment of debt can restart the limitation period, which is why it is a separate document.
- 07Interest above the rate the court considers reasonable can be scaled down, so the rate should be defensible.
A loan agreement is not a promissory note
These two documents are routinely confused, and the confusion costs lenders the ability to complete the transaction online. A promissory note is defined in the Negotiable Instruments Act, 1881 as an instrument in writing containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person or to the bearer. Its defining feature is negotiability: the instrument can be transferred, and a holder in due course can enforce it. That legal character is why it is treated with care, and it is why negotiable instruments other than cheques sit in the First Schedule to the Information Technology Act, 2000, which places them outside the Act altogether. The 2022 amendment to that Schedule matters here, and it is worth stating precisely because it is easy to get wrong in either direction. It carved out demand promissory notes and bills of exchange issued in favour of, or endorsed by, an entity regulated by the RBI, NHB, SEBI, IRDAI or PFRDA. Those instruments are therefore no longer excluded and can be executed electronically, which is what made fully digital secured lending possible on the platforms lenders use. A promissory note between private individuals gained nothing from that change and remains outside the Act. A loan agreement is not a negotiable instrument. It is a contract recording the terms of a facility: how much is lent, on what interest, repayable how and when, with what consequences on default, and with what security. It is not transferable by endorsement, and it does not carry the holder-in-due-course protections. What it does carry is a complete record of the bargain, which is usually what a private lender actually needs when repayment stops. There is a second practical difference. A promissory note proves an obligation to pay a sum. A loan agreement proves the terms, and terms are what decide the dispute: whether interest was payable at all, from what date, whether the borrower was in default, whether an event of default accelerated the whole balance, and whether a guarantor is liable. Where the lender wants both, the usual structure is a loan agreement as the principal document, with a promissory note used where a bank or a counterparty insists on it. Where that promissory note is a demand promissory note in favour of a regulated financial entity it can be executed electronically; where it is a private note, it is executed on stamp paper.
The clauses that make the loan recoverable
The parties and their identification. Names should match identity documents exactly. Where the lender is an entity, the signatory's authority to lend should be established, because a borrower who later disputes the loan will begin by questioning whether the person who signed for the lender was authorised to. The amount and the mode of disbursement. State the principal, and evidence the disbursement. A bank transfer record referencing the agreement is stronger than a cash payment with no receipt; where cash is unavoidable, a receipt signed by the borrower on the same date should accompany it. Interest, and the basis on which it is calculated. State the rate, whether it is simple or compound, the compounding frequency if any, the day-count convention, and whether interest continues after default. Interest that is left to implication is the single most common gap in private lending documents. Repayment schedule and the due date. A loan repayable "on demand" and a loan repayable in instalments are different instruments commercially and produce a different limitation analysis. A schedule with dates and amounts removes the argument about when the money fell due, which is the date from which the limitation clock runs. Prepayment. Whether the borrower may repay early, whether a prepayment charge applies, and whether prepayment requires notice. Default and acceleration. Define what constitutes an event of default, including non-payment, breach of a representation, or a change in the borrower's circumstances where that is relevant, and state whether the lender may then declare the entire balance immediately due. Security and guarantee. Where the loan is secured, the security document is separate and, if it creates an interest in immovable property, will require execution and registration in the manner the law requires. Where a third party guarantees the loan, the guarantee is a separate instrument governed by Sections 126 and 128 of the Indian Contract Act, 1872. Dispute resolution, governing law and jurisdiction. For commercial lending, an arbitration clause is often useful, and the library covers drafting considerations in its guide on arbitration clauses in Indian contracts. Witnesses and execution. Witness attestation is not legally mandatory for the validity of a loan agreement, but it adds evidentiary weight, and the parties and witnesses can all sign in the same electronic flow.
Interest: how much is enforceable
Interest is where a loan agreement is most often found to have promised more than it can deliver. A lender may agree any rate with a borrower, and the agreement is enforceable as a contract. But two things temper that. The first is the court's jurisdiction to relieve against interest that it considers excessive or unconscionable, particularly in transactions that look like money-lending rather than an isolated advance. A rate that is defensible as a commercial bargain between two businesses is treated differently from a rate charged by a lender to an individual in distress. The second is state money-lending legislation, which in several states imposes registration and licensing requirements on persons carrying on the business of money-lending, and caps the rate that a licensed money-lender may charge. An isolated advance between friends or between group companies is not money-lending business, but a person who lends regularly may fall within the licensing regime, and an unlicensed money-lender can find the loan itself affected. Any lender who lends repeatedly should establish the position in their state before relying on the agreement alone. The practical drafting consequence is that the rate should be one the lender can defend, stated with the method of calculation, and the agreement should not conceal the effective rate behind a processing fee or a discounting structure. An inflated rate stated transparently is enforceable. An honest rate concealed behind fees invites the borrower to reopen the whole account.
Limitation: the three-year clock and how an acknowledgment affects it
A lender's right to recover money lent does not last forever. Under the Limitation Act, 1963, a suit for the recovery of money payable under a contract must ordinarily be filed within three years from the date the money became due. That date depends on how the loan is framed. A demand loan has no fixed due date, so the period runs from the date of a demand, which is one reason a written demand matters. An instalment loan produces a separate cause of action for each instalment as it falls due. A loan repayable on a stated date runs from that date. Two provisions can change the position, and both are frequently relied on in private lending. Section 18 of the Limitation Act, 1963 provides that where, before the expiry of the prescribed period, a person liable to pay a debt acknowledges the liability in writing signed by them, a fresh period of limitation runs from the date of the acknowledgment. Section 19 deals with part payment of the principal, which has a similar effect where the payment is evidenced in the manner the section requires. Those provisions are why a written acknowledgment of debt is valuable independent of the original agreement, and why a borrower's part payment should be documented rather than merely received. The acknowledgment must be signed by the person liable, must be made before the period expires, and must acknowledge the liability as subsisting. A statement that merely recounts a dispute, or that admits the loan subject to accounting that is never done, may not achieve what the lender expects. The library deals with this document separately in its guide to acknowledgments of debt. The other practical step, where the original period is close to expiry and the borrower is not paying, is to file suit or issue a legal notice rather than to keep negotiating informally. The library covers the notice route in its guide to legal notices for payment recovery.
Stamping the loan agreement
Stamp duty on a loan agreement depends on the state and on the instrument. Under the schedule to the Indian Stamp Act, 1899 and the corresponding state stamp legislation, agreements in general attract duty under one article, while instruments that secure a loan attract duty under a different article computed on the amount secured. The distinction matters because a loan agreement that also creates a security interest can be assessed differently from a plain agreement to repay. Two consequences follow. The first is that the category of instrument should be settled before the duty is paid, not after. The second is that the stamp must be in place before or at the time of execution, because Section 35 of the Indian Stamp Act, 1899 makes an insufficiently stamped instrument inadmissible until the duty and penalty are paid. In Gujarat and several other states, the position on e-stamping and the current rates can be verified through the state revenue portal, and the library's guide to stamp duty on agreements in Gujarat covers the state position. The useful practical point is that a loan agreement is generally eligible for e-stamping, because it is not a negotiable instrument. That means the stamp can be obtained as an e-stamp certificate before the agreement is signed, and the certificate reference can be written into the agreement itself.
Signing and stamping a loan agreement online
Because a loan agreement is not a negotiable instrument and is not compulsorily registrable in its own right, it can be executed end to end online. The sequence: the agreement is drafted as a digital document; the stamp category and the state position are confirmed and an e-stamp certificate is obtained for the correct amount before execution; the certificate particulars are incorporated into the agreement; the document is routed for signature, usually lender first and borrower second, or both in parallel; and the executed file, signature certificates and audit trail are retained together. Where a promissory note is also being used, that instrument is executed physically on stamp paper with a wet signature, and the two documents cross-refer to each other so that neither stands alone. Where the loan is secured by an interest in immovable property, the mortgage or charge document is executed and registered separately, and the registration step is not remote. The parties themselves must sign in their own names, and the borrower should be the person who actually receives or controls the funds. A loan agreement signed by one person against money paid to another creates exactly the argument the document was meant to prevent.
Where private loans usually fail
Silence on interest. The parties discussed 18 per cent, the agreement says nothing, and the borrower successfully resists interest beyond the statutory or a nominal rate. No evidence of disbursement. The agreement recites that a sum was lent but there is no bank record, no receipt, and no reference in the transfer narration. A due date that does not exist. A loan with no fixed date and no demand leaves the lender arguing about when limitation began. An acknowledgment obtained too late. Section 18 of the Limitation Act, 1963 requires the acknowledgment to be made before the prescribed period expires. An acknowledgment signed after the period has run does not revive the original claim, though it may create a fresh promise to pay governed by a different analysis, and the point is worth taking advice on rather than assuming. A guarantee that was never separately documented. Where a family member or director has orally agreed to stand behind the loan, the guarantee has not been created in the manner the law expects. Security that was never perfected. A charge over property that was agreed but never registered gives the lender a personal claim and no priority.
When to obtain a review
A review is especially useful when…
- — You are lending to a relative, friend, founder or group company and the terms are still informal
- — You need to establish the date from which limitation runs before it expires
- — You are unsure whether a loan agreement or a promissory note is the right instrument
- — You want the loan signed and stamped without either party travelling
Primary references
Official sources used for this guide
- Indian Contract Act, 1872 - Sections 2, 10 and 126-128 (contracts, guarantee and surety liability)↗
- Negotiable Instruments Act, 1881 - Section 4 (promissory note)↗
- Limitation Act, 1963 - Sections 18 and 19 (acknowledgment and part payment)↗
- Indian Stamp Act, 1899 - Section 35 and the Schedule (duty on agreements and security documents)↗
- Information Technology Act, 2000 - Sections 4, 5 and 10A, and the First Schedule↗
Legal information notice
This article is general legal information, not legal advice. Whether a particular document is the right instrument for your transaction, and how it should be stamped or registered, depends on your facts and on the stamp law of the relevant state. Take advice on your own matter before you sign.