How to Review a Loan / Facility Agreement in India

A loan agreement, often called a facility agreement for anything beyond a simple personal loan, is the document that decides who takes the loss first if the borrower cannot pay. Most people read it for the interest rate and skip the rest. That is the biggest mistake in reviewing one: the rate is usually the least negotiable term in the document, while the covenants, events of default, and security mechanics are where the real risk sits and where careful drafting changes outcomes. (Adira, which publishes this guide, makes contract review and CLM software, so we have a commercial interest in you understanding loan documents well, but this piece is written to be useful on its own.) This guide walks through what a loan or facility agreement contains, the Indian statutes that override whatever the document says, a red-flags table, a clause rewrite, and a checklist you can run against a real draft.

Two documents, not one

A loan transaction in India is rarely a single document. The facility agreement sets out the commercial terms: principal, interest, covenants, events of default. Security documents sit alongside it: a mortgage deed for immovable property, a hypothecation deed for movable assets or receivables, a pledge agreement for shares or securities, and separately a guarantee deed if a third party is backing the borrower. A facility agreement that looks airtight is worth little if the security documents referenced in it were never actually executed and registered, or if a guarantee it relies on turns out to be capped or time-limited in ways the facility agreement does not mention. For the guarantee piece specifically, see Guarantee Clauses in India.

Principal, disbursement, and conditions precedent

The facility agreement should state the principal amount, the facility type (term loan, working capital, overdraft, revolving credit), and the disbursement mechanism as a fixed number and a defined process, not a range or "as approved by the Lender's credit committee." Disbursement is almost always gated behind conditions precedent (CPs): security documents executed and, where applicable, registered, insurance in place, KYC documentation complete, sometimes a drawdown request in a prescribed form. A CP list that names a responsible party and a drop-dead date is functional. One that just says "documents satisfactory to the Lender" gives the lender unilateral discretion to delay disbursement indefinitely, which matters most for a borrower who has already committed capital or timelines assuming the money arrives on schedule.

Interest and default interest: the RBI penal charges rule

Interest rate structure (fixed, floating, benchmark-linked with a spread) is usually the least negotiable part of a facility agreement, since lenders price risk internally and rarely deviate from their board-approved rate matrix. Default or penal interest is where more real drafting risk lives, and this is an area where Indian regulation changed materially and recently.

Until 2024, Indian loan agreements routinely charged "penal interest": an additional percentage added on top of the contractual rate the moment a borrower defaulted or breached a covenant, often compounded, meaning interest was charged on interest. The Reserve Bank of India ended that structure for regulated entities (banks, NBFCs, and other RBI-regulated lenders) through its circular on Fair Lending Practice, Penal Charges in Loan Accounts (RBI/2023-24/53, DoR.MCS.REC.28/01.01.001/2023-24, dated 18 August 2023), effective for fresh loans from 1 January 2024 and for existing loans from their next review date or within six months, whichever came first. The circular states:

"Penalty, if charged, for non-compliance of material terms and conditions of loan contract by the borrower shall be treated as 'penal charges' and shall not be levied in the form of 'penal interest' that is added to the rate of interest charged on the advances." Source: RBI, Fair Lending Practice, Penal Charges in Loan Accounts (18 August 2023)

The circular also closes the compounding route directly: "There shall be no capitalisation of penal charges, i.e., no further interest computed on such charges." In plain terms, a regulated lender can still charge you for defaulting, but the charge has to be a flat, disclosed, reasonable amount tied to the actual non-compliance, not folded into the interest rate and compounded quarter after quarter.

This did not come from nowhere. The Supreme Court had already flagged the capitalisation problem in Central Bank of India v Ravindra and Others (Supreme Court of India, decided 18 October 2001, AIR 2001 SC 3095, (2002) 1 SCC 367), which held that penal interest, charged as a penalty for non-payment, cannot be capitalised, and no further interest can be claimed on the penal interest amount itself, while ordinary contractual interest on periodical rests can still be capitalised as part of the principal. The 2023 circular converts that judicial limit into a standing rule and goes further: penal interest as a concept is now barred outright for RBI-regulated lenders, not merely barred from compounding.

A test you can run: Ctrl+F your facility agreement for "penal interest." If it appears anywhere describing what happens on default, and your lender is a bank or NBFC, the clause is very likely non-compliant with the 2023 circular and should read "penal charges" instead, calculated as a reasonable, disclosed amount, not as an addition to the interest rate.

Security: creating and registering the charge

If the loan is secured, the facility agreement will reference a mortgage, hypothecation, or pledge in favour of the lender over specific assets. For a corporate borrower, creating the security document is only half the job. Section 77(1) of the Companies Act, 2013 makes registration a separate, mandatory step:

"It shall be the duty of every company creating a charge... to register the particulars of the charge... with the Registrar within thirty days of its creation." Source: Section 77, Companies Act, 2013 (Indian Kanoon)

Following the Companies (Amendment) Act, 2019, a company that misses the 30-day window can apply to the Registrar for a further 30 days on additional fees, and, if that is also missed, a further period on ad valorem fees, after which registration needs a fresh application under Section 87. What makes this section matter beyond a compliance checkbox is Section 77(3), the enforcement teeth:

"No charge created by a company shall be taken into account by the liquidator or any other creditor unless it is duly registered under sub-section (1)."

In practice, this means an unregistered charge is close to worthless the moment it is actually tested, that is, the moment the borrower is insolvent and other creditors are competing for the same assets. A lender holding a validly executed but unregistered mortgage can find itself treated as an unsecured creditor in a liquidation or insolvency proceeding, ranking behind every properly registered secured creditor, regardless of how carefully the mortgage deed itself was drafted.

A test you can run: if the borrower is a company, check the Ministry of Corporate Affairs' charge index (Form CHG-1 filings against the company's CIN) to confirm the charge was actually registered, not just executed, and note the registration date against the 30-day (or extended) window from the date the security document was signed.

Representations, covenants, and what each kind actually does

A facility agreement typically carries three kinds of covenants, and confusing them is a common mistake:

• Representations are statements of fact as of signing or drawdown: the borrower is validly incorporated, has authority to borrow, is not in default elsewhere, its financial statements are accurate. A false representation is usually a standalone event of default, separate from any payment failure.
• Affirmative covenants are ongoing promises to do things: maintain insurance, provide periodic financial statements, maintain financial ratios (debt-service coverage, debt-to-equity), notify the lender of litigation above a threshold.
• Negative covenants are ongoing promises not to do things without consent: no further charges on the same assets (a "negative pledge"), no disposal of material assets outside the ordinary course, no change in the nature of the business, no dividends beyond a stated limit while the loan is outstanding.

Financial covenants deserve attention because they are tested quarterly or annually against defined ratios, and a borrower can trip one, and trigger a technical default, without missing a single payment. Check whether ratio definitions (EBITDA, net debt) are spelled out in the agreement or left to "applicable accounting standards," since the two can produce different pass/fail results.

Events of default and acceleration

The events of default clause lists what lets the lender call the entire loan due immediately (acceleration) rather than waiting out the repayment schedule. Standard triggers: payment default (usually with a short cure period, 3 to 7 business days for a first miss), covenant breach, a representation proving false, cross-default (default under any other facility above a threshold), insolvency-related events, and a material adverse change (MAC) in the borrower's finances.

Cross-default clauses deserve specific attention: they can turn a default on a small, unrelated facility into an immediate crisis for every other loan the borrower holds. A narrower "cross-acceleration" clause, which triggers only if the other lender has actually accelerated rather than merely if a default technically exists, is meaningfully less aggressive and worth negotiating for.

Prepayment

Whether prepayment is free or penalised depends on regulation and loan type. For floating-rate term loans to individual borrowers, the RBI has directed regulated entities not to charge foreclosure charges or prepayment penalties, a protection later extended to floating-rate loans for micro and small enterprises too. For fixed-rate loans, and most corporate and working-capital facilities, prepayment penalties (commonly 1% to 3% of the prepaid amount) remain standard and enforceable. Check whether the facility is floating-rate and whether the borrower is an individual or MSE before assuming a penalty is negotiable; for a corporate term loan it is usually a commercial point, not a regulatory one.

Governing law and how a default is actually enforced

The governing law clause is rarely contested in a domestic Indian facility agreement, since Indian law applies as a matter of course; it matters more in a cross-border facility where a foreign lender may prefer its own law and enforceability of a foreign judgment in India becomes relevant. What matters more in practice is how a default actually plays out, because the facility agreement's default clause is not where enforcement stops.

For a secured loan where the lender is a bank or specified financial institution, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) lets the lender enforce security without going to court first. Section 13(2) allows the secured creditor, once the account is classified as a non-performing asset, to issue a written demand notice requiring the borrower to discharge the liability within 60 days, failing which the lender can proceed under Section 13(4) to take possession of and sell the secured asset. This is why SARFAESI is the enforcement route most Indian secured lending is actually built around.

Separately, for a corporate borrower in real distress, a lender holding a "financial debt" above the statutory threshold can trigger the Insolvency and Bankruptcy Code, 2016 directly. Section 7 lets a financial creditor, alone or jointly with others, apply to the National Company Law Tribunal to start the corporate insolvency resolution process once a default has occurred, on proof of the debt and default (a notification effective 24 March 2020 raised the minimum default threshold for this route from Rs 1 lakh to Rs 1 crore). This route needs no security interest at all, so an unsecured lender can use it too, and it shifts control of the borrower to a resolution professional rather than simply recovering one asset.

Stamp duty on the instrument

A loan agreement, and each security document alongside it (mortgage deed, hypothecation deed), is a chargeable instrument under the Indian Stamp Act, 1899 or the applicable state legislation, and the rate varies by state and instrument; a mortgage deed typically attracts a materially higher rate than the facility agreement itself. Underpaying, or paying in the wrong state, does not void the loan, but it can bar the document from being admitted as evidence in court until the deficient duty and penalty are paid. For the state-by-state mechanics, see Stamp Duty on Electronic Contracts in India.

Red flags

Normal	Red flag	Why it matters
Principal and disbursement mechanism stated as fixed numbers and a defined process	"Amount and terms subject to final credit approval" with no fixed figure	Leaves the core commercial term undetermined at signing
CP list names a responsible party and a drop-dead date	"Documents satisfactory to the Lender," no deadline	Disbursement can be delayed indefinitely at the lender's discretion
Default charge described as "penal charges," a flat reasonable amount, not compounded	Clause still says "penal interest," added to and compounded with the rate	Non-compliant with the RBI's 2023 circular for regulated lenders
Security document referenced, executed, and a registration timeline named	Security "to be created" with no execution or registration deadline	An unexecuted or unregistered charge is close to worthless against a liquidator, per Section 77(3)
Financial covenant ratios defined within the agreement itself	Ratios reference "GAAP" or "applicable accounting standards" with no worked definition	The same numbers can produce different pass/fail results depending on whose accounting judgment applies
Cross-default tied to actual acceleration by another lender	Cross-default triggers on any default under any other facility, however small	A minor unrelated default can accelerate every loan the borrower holds
Prepayment terms match the loan type (free for floating individual/MSE loans, negotiated otherwise)	Prepayment penalty applied to a floating-rate individual loan	May directly contravene the RBI's foreclosure-charge directions
Guarantee, if any, is capped, dated, and cross-referenced to this specific facility	Facility agreement assumes an unlimited, undated guarantee "backs" it with no cross-reference	See Guarantee Clauses in India for what an unbounded guarantee actually exposes the surety to
Set-off rights between loan and deposit accounts stated expressly, with scope defined	Silence on set-off, or an unqualified right assumed by the lender	See Set-Off Clauses for why set-off needs an express clause, not assumption
Stamp duty payable and paying party named for the facility agreement and each security document	Silent on stamp duty, or duty paid on only the facility agreement, not the mortgage	An underpaid document can be barred from evidence until duty and penalty are cured

Bad clause, better clause

Bad: "In the event of any default or delay in payment by the Borrower, the Borrower shall be liable to pay penal interest at the rate of 2% per annum over and above the applicable rate of interest, compounded monthly, on the entire outstanding amount, in addition to and cumulative with any other remedies available to the Lender."

What is wrong: this is exactly the "penal interest," added to the rate and compounded, structure the RBI's 2023 circular bars for regulated lenders. It also applies the charge to the "entire outstanding amount" rather than to the specific overdue sum, and gives no cure period before the charge attaches.

Better: "In the event of a payment default continuing beyond 5 business days from the due date, the Borrower shall pay a penal charge of 2% per annum, calculated only on the overdue instalment amount for the period of actual delay, on a simple (non-compounded) basis. No further interest shall be computed on this penal charge, and it shall be disclosed to the Borrower as part of the Key Facts Statement for the facility."

What changed: the charge is now framed as "penal charges," not "penal interest," applies only to the overdue amount rather than the whole outstanding balance, runs on a simple basis with no capitalisation, and includes a short cure period, all of which brings the clause in line with the RBI's 2023 rule for regulated lenders.

Loan agreement review checklist

1. Are the principal amount and disbursement mechanism stated as fixed figures, with a named CP list and deadline?
2. Does the default-charge clause use "penal charges" language, non-compounded, applied only to the overdue sum?
3. If secured, is the security document referenced by name, and does the agreement state a registration deadline consistent with Section 77's 30-day window?
4. Are financial covenant ratios (DSCR, debt-to-equity) defined within the agreement, not left to external accounting judgment?
5. Is cross-default limited to actual acceleration elsewhere, rather than any default however small?
6. Does the prepayment clause match the loan type, free for floating-rate individual or MSE loans, negotiated otherwise?
7. If a guarantee backs the facility, is it capped, dated, and cross-referenced to this specific agreement?
8. Is a set-off right, if any, stated expressly with defined scope, rather than assumed?
9. Has stamp duty been paid on both the facility agreement and every security document, in the correct state?
10. Does the agreement name the governing law and, for a cross-border facility, address enforceability of a foreign judgment in India?

You can run this checklist against a real facility agreement draft, clause by clause, for free, in Weave, before it goes to your finance team or a lawyer for a final read.

US and global contrast

A US credit agreement covers broadly the same ground: principal, interest, covenants, events of default, security through a UCC-1 filing rather than a Companies Act charge registration. Two differences stand out. Default-rate spreads remain freely negotiable in most US commercial lending, with no equivalent to the RBI's 2023 bar on compounding a default charge into the interest rate, though state usury statutes impose their own ceilings. And US secured enforcement generally runs through judicial foreclosure or a UCC Article 9 self-help repossession, which does not mirror SARFAESI's specific 60-day statutory notice-then-sale mechanism, a distinctly Indian creation built to speed up recovery for banks and specified financial institutions.

FAQ

Can a bank still charge me extra for missing an EMI in 2026? Yes, but since the RBI's August 2023 circular took effect, it has to be structured as a flat, disclosed "penal charge" on the overdue amount, not as "penal interest" added to and compounded with your regular interest rate. If your facility agreement still uses "penal interest" language and your lender is a bank or NBFC, that clause is likely outdated.

What happens if a company borrower's charge is never registered with the Registrar? Under Section 77(3) of the Companies Act, 2013, an unregistered charge cannot be taken into account by a liquidator or any other creditor. In practice, this means the lender's "security" offers little real protection in an insolvency scenario, ranking effectively as unsecured.

Is a loan agreement enforceable in India even if the stamp duty was not paid? The loan itself is not automatically void, but an insufficiently stamped document generally cannot be admitted as evidence in an Indian court until the deficient duty, plus any penalty, is paid. This is a practical, not a validity, problem, but it can derail enforcement timing badly.

Can my lender accelerate the entire loan for a covenant breach even if I have never missed a payment? Yes, if the facility agreement lists covenant breach as an independent event of default, which most do. Financial covenant tests (like a debt-service coverage ratio falling below a threshold) can trigger acceleration entirely independent of payment history.

Does SARFAESI apply to every secured loan? No. SARFAESI enforcement is available to banks, specified financial institutions, and asset reconstruction companies registered under the Act, for security interests over specified categories of assets, subject to some exclusions (such as security interests below a stated value threshold and agricultural land). A private, non-institutional lender generally cannot use SARFAESI and must rely on ordinary civil remedies or, where applicable, the IBC.

What is the minimum default amount for a bank to file for insolvency against a corporate borrower? Since a Central Government notification effective 24 March 2020, the minimum default threshold to trigger an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 is Rs 1 crore, raised from the earlier Rs 1 lakh.

This guide gets you to a working understanding of what a loan or facility agreement contains and the Indian statutes and regulatory rules that apply regardless of what the document itself says. It does not tell you whether a specific facility agreement you have been offered, or asked to sign as guarantor, is fair, fully compliant, or enforceable on its actual facts, that depends on the exact drafting, your lender's regulatory status, and the circumstances of your borrowing. This is not legal advice. Talk to a lawyer, and where relevant a chartered accountant, before you sign, negotiate, or rely on a loan or facility agreement in a real transaction.