Sale deed cancellation by the seller

This is just threat.  Even before he comes to you next time, send a letter to the seller's bank about the  confirmation of sale and loan transfer, and send copy of this notice with reply received from Bank to seller and ask him not to disturb and harass with threats any more, as the procedure takes time and nothing is related in between the parties, and the part of a third party, namely a Bank is a procedural formality.

Thank you very much for your reply Mr. Prasad. However, i forgot to add that the seller has not handed over the house keys yet to the buyer(my friend). Does that change anything and although it is a threat, is cancellation at this stage possible and what we can do to stop it?

Physical possession and delivery of property is essential for any sale transactions.  Otherwise you have to seek for possession by going through Court procedure, which unnecessarily takes abnormal time. (In case of complications)

If the sale deed has been registered before statutory registering authority and possession handed over to the buyer then sale deed cannot be cancelled.

Any sale deed can be cancelled by a an appropriate Court, on receiving proper petition from proper persons only.  The sale deed can only be cancelled through a declaration suit.