The Non-Performing Loans (NPL) industry is characterized by significant information asymmetry, and addressing the investment risks arising from this asymmetry is our challenge. Having the capability to obtain comprehensive information as detailed as possible is one of the core aspects. Due diligence is our first step in gathering information, and I always believe that a thorough and robust due diligence report impacts on whether the investment is successful or not, accounting for more than 50% of its significance. Then, how do we conduct a qualified due diligence?

Our industry has developed a standard mode for due diligence, with similar basic processes across banks, AMC, foreign capital, and private institutions. The differences in the details mastered by each institution during practical due diligence lead to different final outcomes.

This article will not reiterate the due diligence process but will share some personal insights from practical experience for the readers.

1. Document Review
When we receive a new project, the first step is to thoroughly read all the debt documents. The objective is to recreate the loan scenario through these documents, not overlooking any minor details, and find valuable information. This might include attempting to interview the lender at the time or understanding the background of the collateralized assets.

2. Checking Business Registration Information
For every project, we check the debtor's (or guarantor's) business registration information, especially the internal registration documents. Even though the recent company registration management methods may not provide detailed documents, it's crucial to gather as much information as possible from the business registration office. This can help us deeply understand the debtor's business history, rise and fall, and details about land acquisition. This information is invaluable during future negotiations. Additionally, unexpected findings might arise, like bank account information that can be used for legal enforcement.

3. Collateral Investigation
Acquiring projects with collateral assets carries relatively lower risk, so verifying the legality and valuation of the collateral is a core part of due diligence. Besides checking the mortgage status and seizure information of the collateral at land and real estate departments, it’s important to understand the original land acquisition price and any issues related to leased land, as these can affect the priority of the mortgage debt during disposal.

Due diligence covers a broad scope, and the development of the internet has revolutionized information gathering. However, the NPL industry remains one with severe information asymmetry under current national conditions. Due diligence is about reducing the investment risks associated with this asymmetry as much as possible. The above points are my personal insights on the key aspects to specialise in during due diligence, shared for mutual learning and encouragement.