Overview of NBFC Due Diligence

NBFC Due Diligence determines the full commercial value of a non-banking financial company (NBFC). This value comes from its assets, liabilities, and its compliance with laws. It also checks for any liabilities that might harm its stakeholders. Companies should do this before they start joint ventures, investments, acquisitions, or partnerships. This process looks at financial statements, asset quality how the company is run, and its business model. It looks at credit risk how assets and liabilities are managed, if there's enough capital, and any goals set by the Reserve Bank of India or other institutions at the time. The process also checks operational and market risks as well as legal, tax, and compliance ratings. NBFC Due diligence also looks at how the company behaves and is set up. This includes how it's governed, its internal controls, and how it manages risk. These factors show how the NBFC's liabilities will help the company grow and stay stable in the future. In this case due diligence helps stakeholders by making sure the NBFC can last and follow the rules it needs to.

Advantages of NBFC due diligence

• Risk Identification: Aids in recognizing usual financial, operational, or regulatory risks that may lead to incurrence of more liabilities that were not foreseen.
• Regulatory Compliance: Evaluates the NBFC’s compliance with RBI and other regulatory standards so the NBFC complies with the law hence minimizing on sanctions.
• Financial Health Verification: Analyses of balance sheets, profitability and credit risk plus sustainability of assets in order to make an evaluation on the financial health of the company concerned.
• Transparency and Trust: Offers confidence to investors, lenders and partners by helping them to look at the operations and management of the NBFC in a clear manner.
• Informed Investment Decisions: Enables investors and acquirers to conduct risk-adjusted evaluation of potential gains and correctly evaluate them against successfully identified risks.
• Enhanced Corporate Governance: Reviews governance policies and controls and reviews companies for lack of integrity and fail in ethical stewardship.
• Valuation Accuracy: Enables genuine planning to be given by assessing the value of an organization’s properties M a genuine appraisal is made for the organization’s properties, earnings prospective and debts that the organization has making sure that over EA is not made.
• Improved Negotiation: Enhances the bargaining power of stakeholders by revealing important information and in need of enhancement.
• Long-term Stability: Promotes the activities needed for NBFC to continue its operations hence meeting its obligations thereby increasing its operational life plus credibility in the market.

Meaning of NBFCs

An NBFC it is a financial company that involves in all the banking related activities but does not possess the bank’s license. Licensed by RBI, NBFCs are involved in loaning, asset financing, leasing, and investment, except that they cannot accept demand deposits as a typical bank. It has become evident that they are important players in the provision of credit to various sectors that are locked out of traditional sources of finance and are very vital in the realization of growth all over the world. As medium and large NBFCs do not offer checking account services, they have specific sources of funds. Some of the regulation that NBFCs have to fulfill to provide health stability to themselves ad protect the consumers are as follows.

NBFC Due Diligence includes following assessments

• Financial Due Diligence
• Scrutinize previous financial reports (balance sheet, income statement, and the statement of cash flow) of the past three to five years.
• Check on the validity of the main global ratios, such as profitability, leverage and liquidity ratios.
• Evaluate profitability performance through LCR, CACR and examine efficiency through asset quality, mainly through NPAs and provisioning.
• Provide the analysis of loan portfolio in terms of its gross loan, loan by type, loan by industry and loan by sector.
• Review equity and liability towards capital adequacy and funding stability and availability.
• Assess income the revenue streams, the historical growth rates and the future projection.

• Regulatory and Compliance Pre-Acquisition Examination
• Ensure compliance to RBI regulations of licensing and registration.
• Check the procedure of being compliant with the laws like Know Your Customer (KYC), Anti-money laundering (AML) and data privacy laws.
• Look at compliance with capital adequacy, provisioning standards and asset code of conduct.
• Research the filing of the recent regulation, check the report of the recent inspection, and look for the any communication with the regulatory agencies.
• Although it is quite critical, individuals are often compelled to disregard other considerations, such as tax returns, TDS, and GST payments, when attempting to meet other statutory requirements.

• Operational Due Diligence
• Assess operational efficiency, including core systems for loan management and data processing.
• Review internal controls, risk management processes, and IT infrastructure.
• Check business continuity plans, cybersecurity measures, and data protection policies.
• Evaluate the scalability of operational processes to support growth.

• Originally, credit risk and loan portfolio assessment were included in its activities.
• Evaluate credit policies, an assessment of risk during underwriting, and borrower characterization.
• Check the loan approval, disbursement and repayment efficiency mechanisms.
• Owner Eclipse Inc. needs to analyze its loan portfolio quality through a delinquency rate and loss rate.
• Assess of NPAs and sufficiency of provisions for losses.

• Legal Due Diligence
• Enter the corporate structure, its ownership and any change in the equity structure.
• Carefully assess all main contracts starting from loan ones, including vendors’ and clients’ ones.
• Look for any outstanding or threatened law suits, claims and legal proceedings as well as legal proceedings other than lawsuits.
• If necessary, verify the licensing and the rights to a specific brand or logo.
• Check on compliance with employment laws and or regulations.

• Tax Due Diligence
• Confirm compliance with income tax, GST, and other tax obligations.
• Assess any outstanding tax disputes, audits, or assessments.
• Verify accuracy of tax payments, filings, and availment of tax incentives or credits.
• Check any potential tax exposures or contingent liabilities.

• Corporate Governance Assessment
• Review board structure, management quality, and independence of board members.
• Assess board meeting frequency, governance practices, and decision-making processes.
• Evaluate policies on conflict of interest, whistleblower protection, and ethical standards.
• Examine transparency in financial reporting and adherence to corporate governance codes.

• Human Resources (HR) Due Diligence
• Review organizational structure, key management profiles, and employee contracts.
• Check HR policies, including recruitment, training, performance evaluation, and compensation.
• Verify compliance with labor laws and employee welfare provisions.
• Evaluate turnover rates and key person dependency risks.

• Market and Competitive Positioning
• Assess the NBFC’s market share, brand reputation, and competitive advantages.
• Review market trends, industry benchmarks, and peer comparisons.
• Evaluate growth strategies and adaptability to changing market conditions.

• Environmental, Social, and Governance (ESG) Assessment
• Review ESG policies and initiatives, including corporate social responsibility (CSR) activities.
• Check for sustainability efforts, waste management, and energy efficiency measures.
• Assess ethical practices and social impact on communities.

• Risk Management Framework
• Review policies for credit, liquidity, market, and operational risk management.
• Evaluate the NBFC’s ability to identify, monitor, and mitigate key risks.
• Examine reporting and risk assessment practices to ensure regulatory compliance.

Documents that are required for NBFC due diligence

• audited financial statements
• regulatory filings
• tax returns
• loan agreements
• contracts
• legal documents
• corporate governance records
• RBI licenses
• KYC/AML compliance records
• and employee contracts.

Due Diligence Process

The due diligence process typically follows these steps:

• Information Gathering: Collect relevant data from reliable sources such as financial records, market data, and corporate documents.
• Analysis: Evaluate the gathered information against established criteria for legal compliance, financial soundness, and operational efficiency.
• Verification: Ensure that all documents are authentic and accurately reflect the NBFC's status.
• Expert Consultation: Involve professionals such as lawyers and accountants to provide insights into complex areas of due diligence

Legal Compliances to Check in NBFC Due Diligence

• RBI Registration and Licensing: First, it needs to register NBFC with RBI to perform its operations and then verify if it conforms to the standards of a specific type of NBFC.
• KYC and AML Compliance: Ensure you conform to the standards of customer identification as well as ensuring that you remain complaint with AML laws.
• Corporate Law Compliance: Verification of the Incorporation documents such as Articles of Association, Memorandum of Association, organizational chart of the company, the contract between shareholders fully ensure compliance the Companies Act, 2013.
• Contractual Obligations: Review every large loan taken out and every partnership, vendor and customer contract.
• Data Protection: Verify if data privacy act had been complied to so as to secure the customers information.
• Labor and Tax Compliance: Scan employee’s contracts, employment acts and standards, certifications in tax for income taxes, GST, TDS and so on.

Checklist for NBFC Due Diligence

• Financials: Financial statements, asset quality, cash flow analysis, capital adequacy.
• Compliance: Regulatory filings, KYC/AML checks, tax filings.
• Legal: Pending litigations, contracts, corporate structure, licenses.
• Operations: Operational efficiency, data security, IT systems, internal controls.
• Governance: Board meetings, decision-making practices, transparency.
• HR: Employee policies, contracts, retention rates, key management profiles.
• Market Position: Competitive analysis, market share, growth prospects.
• Risk Management: Credit risk, liquidity risk, operational risk frameworks.

Why you should choose Whizseed?

• Innovation: Cutting-edge technology integration.
• Expertise: Deep understanding of NBFC sector and regulatory requirements
• Reliability: Proven track record with leading financial institutions
• Scalability: Flexible solutions for NBFCs of all sizes
• Customer-Centric: Tailored solutions based on specific needs