Loans to family

Can a person extend an interest-free loan to parents or children?
Is any documentation needed? The loan and repayment will be made through bank.

If the borrower invests the loan amount in a bank deposit and earns interest, who will have to pay tax on such interest? The lender or the borrower? Please note that the loan is a zero interest loan and the lender is not earning anything.

@Bharti_Vasvani can you please help here?