How Banks and NBFCs Perform Legal Due Diligence Before Lending

How-To Guide · Lending Due Diligence

Updated for 2026 · Claw Editorial

A loan application looks complete once the financials check out and the credit score clears. But a loan that is legally sound is a different thing from a loan that is financially sound. If the person signing does not have the authority to borrow, if the collateral has an undisclosed prior charge, or if the security documents are not properly stamped and registered, the lender can end up holding a loan it cannot enforce, no matter how healthy the borrower looked on paper. This guide sets out, step by step, how banks and NBFCs in India perform legal due diligence before lending, from verifying who is actually authorised to borrow to making sure the security the lender is relying on will hold up if it is ever tested.

01Why legal due diligence is separate from credit due diligence

Credit due diligence asks whether a borrower can repay. Legal due diligence asks a different question: even if the borrower wants to repay, can the lender actually enforce the loan and the security behind it if something goes wrong. Both checks run in parallel before a loan is sanctioned, but they are not the same exercise, and skipping the legal side does not show up as a problem until the lender needs to act on a default.

A financially strong borrower can still be a legally weak loan

A company can have clean financials and still hand a lender a loan agreement signed by someone who did not have the authority to borrow that amount, or offer collateral that already carries an undisclosed charge in favour of another lender. None of this shows up in a balance sheet. It shows up only when the lender tries to enforce the loan and finds the documents, the authority, or the security is not what it appeared to be.

Indian corporate and property law puts the burden on the lender

Under the Companies Act, 2013, a board resolution alone is not always enough authority to borrow, and a charge on an asset is not enforceable against other creditors unless it is properly registered. Under property law, a mortgage is only as good as the title behind it, and an unregistered or under-stamped document can be difficult or impossible to rely on later. The law generally does not protect a lender who failed to check these things before disbursing, which is why the check has to happen upfront, not after a default.

The checks span several different records and registries

There is no single place that confirms a borrower’s authority, a property’s clean title, the absence of a prior charge, and the borrower’s litigation history, all at once. A lender has to pull that picture together from the MCA21 registry, the sub-registrar’s records, CERSAI, court records, and the loan applicant’s own documents, and reconcile what each of them shows. The process below sets out that sequence.

02What legal due diligence before lending covers

Legal due diligence before lending is trying to answer one question with several parts: is this loan, once disbursed, going to be enforceable on the terms the lender believes it is being made.

A loan is only as strong as the weakest document behind it. Legal due diligence exists to find that weak document before disbursal, not after a default.

In practice, that breaks down into five areas a lender needs to check before money moves.

• Identity and capacity: is the borrower, co-borrower, and guarantor who they claim to be, and are they legally capable of taking on this obligation.
• Authority: for a corporate borrower, has the right internal approval actually been obtained, and does the person signing have the power to bind the company to a loan of this size.
• Title and security: if the loan is secured, does the borrower actually own, and have the right to mortgage or hypothecate, the asset being offered as collateral.
• Priority: is there an existing charge, mortgage, or claim on that same asset that would rank ahead of the lender’s own security.
• Standing: does the borrower, guarantor, or promoter have pending litigation or regulatory action that changes the risk picture, separate from what a bureau report shows.

The steps below work through these in the order most lenders actually run them, from identity through to documentation and perfection of security.

03Step 1: Verify borrower and guarantor identity

Start with basic verification, done independently rather than taken from the application form. For an individual, confirm identity against PAN and other government-issued identifiers, and confirm the address on record. For a company or LLP, confirm the entity’s registration, status (active, not struck off or under liquidation), registered office, and CIN on the MCA21 portal.

Extend this to every party to the loan, not just the primary applicant: co-borrowers, guarantors, and, for a corporate loan, the promoters and directors who will sign or guarantee the facility. A guarantee is only worth as much as the guarantor’s own legal and financial standing, so their identity and status deserve the same level of check as the primary borrower’s.

04Step 2: Confirm the authority to borrow

This step catches one of the most common defects in corporate lending: a loan signed by someone, or approved in a way, that does not actually bind the company.

Check the constitutional documents

Read the company’s memorandum and articles of association to confirm borrowing is within its objects and that any internal limits on borrowing powers are understood. Under Section 180 of the Companies Act, 2013, a company’s board cannot, on its own, borrow beyond the company’s paid-up capital, free reserves, and securities premium (taken together), except with the consent of shareholders by special resolution. If the proposed facility could push total borrowings past that threshold, a board resolution alone is not enough authority, and the lender should ask for the shareholder resolution as well.

Verify the resolution and the signatory

Obtain the certified board resolution authorising the borrowing and naming the person authorised to sign and execute the loan and security documents on the company’s behalf. Cross-check that the named signatory is in fact a director or authorised officer on record with the MCA21 registry, and that they are not a disqualified director under the Companies Act.

For partnerships and other structures

For a partnership firm, check the partnership deed for borrowing authority and confirm which partners can bind the firm. For a trust or society, check the trust deed or bye-laws for borrowing powers and any conditions attached to them. Each structure has its own source of authority, and the loan documents should be executed by the party the underlying document actually empowers to act.

05Step 3: Verify title to the proposed security

Where the loan is secured, whether by immovable property, plant and machinery, or other assets, the lender needs to independently confirm the borrower actually has clear, marketable title to what is being offered, and the right to create security over it.

For immovable property

Trace the chain of title back a reasonable number of years through the sale deeds, gift deeds, or inheritance documents in the chain, and confirm each transfer was properly executed, stamped, and registered. Obtain an encumbrance certificate from the sub-registrar’s office covering the relevant period, to check for any recorded mortgage, lien, or attachment against the property that is not disclosed by the borrower. Confirm the property tax and any local dues are paid up to date, and that the physical property matches the documents describing it.

For movable assets and stock

For plant, machinery, or stock offered as security, confirm ownership through purchase invoices and, where applicable, insurance records, and physically verify the asset exists and is in the condition represented.

For shares or other financial assets

Where shares are being pledged, confirm they are free from any existing lien or pledge and that pledging them does not breach any existing shareholders’ agreement the borrower is party to.

06Step 4: Check for existing charges and encumbrances

Even where title looks clean on the documents, a separate check is needed to see whether the asset is already pledged as security to another lender. This step is what protects a lender from taking a second charge without knowing it, or from being surprised by a prior secured creditor later.

• ROC charge search: for a corporate borrower, search the register of charges on the MCA21 portal to see what charges the company has already registered against its assets, and confirm the asset offered as security is not already encumbered in favour of another lender.
• CERSAI search: search the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) for any security interest already registered against the borrower or the specific property, since this registry exists specifically to help lenders check for prior charges before lending.
• Sub-registrar records: for immovable property, the encumbrance certificate from Step 3 does double duty here, since it also reveals prior registered mortgages against the same property.

Where a prior charge does exist, the lender needs to decide, before disbursal, whether to require it to be released, to lend on a second-charge or pari passu basis with the earlier lender’s consent, or to decline the security and either restructure the facility or decline the loan.

07Step 5: Search litigation and regulatory history

Alongside the identity, authority, and title checks above, a lender needs to know whether the borrower, guarantor, or promoter has litigation or regulatory action pending that a credit bureau report will not show, such as a recovery suit from another creditor, a cheque bounce case, or an insolvency filing against a corporate borrower.

This is a substantial exercise in its own right, covering which entities to search, which courts and tribunals to cover, and how to handle inconsistent name spelling across records, and it deserves its own depth rather than being compressed into a single step here. For the full, dedicated process, see the litigation due diligence checklist for India. For a survey of AI-based tools built to run this kind of search, see AI litigation strategy tools in India.

08Step 6: Document, execute, and perfect the security

Once the checks above are complete, the loan and security documents have to be drafted, correctly executed, and legally perfected, meaning the security is registered in a way that makes it enforceable against third parties, not just against the borrower.

Draft the right documents

Depending on the facility, this typically includes a loan or facility agreement, a deed of hypothecation for movable assets, a mortgage deed for immovable property, and a deed of guarantee where a guarantor is involved. Each document needs to reflect the terms actually sanctioned, including interest, repayment schedule, events of default, and the specific assets covered by the security.

Stamp and register correctly

Loan and security documents generally need to be stamped under the applicable state stamp duty rules, and a mortgage over immovable property typically needs to be registered with the sub-registrar to be enforceable. Under-stamped or unregistered documents can be difficult to rely on in court later, so this is not a step to compress under disbursal pressure.

Register the charge

For a corporate borrower, the charge created over its assets generally has to be registered with the Registrar of Companies within a prescribed period after creation, under the Companies Act, 2013. A charge that is not registered in time can be treated as void against a liquidator or other creditors, which defeats the purpose of taking the security in the first place. Security interests over certain assets also need to be registered with CERSAI.

09Step 7: Set conditions precedent and post-disbursal checks

Legal due diligence does not end at disbursal. Two things carry it forward.

First, where a check in the steps above turns up something that needs fixing, but is not serious enough to stop the loan, make it a condition precedent: something the borrower must complete before, or shortly after, disbursal, such as releasing a prior charge, obtaining a missing shareholder resolution, or completing a pending registration. Track these to closure rather than noting them and moving on.

Second, build in ongoing monitoring. A borrower who was clean at disbursal can have a new charge, a new case, or a regulatory action arise during the life of the loan, and none of it will surface unless someone checks again. This matters most for larger exposures and should be built into regular portfolio review rather than left to chance.

For a comparable, structured checklist approach used in a different due diligence context, see the vendor due diligence checklist for India, which follows a similar logic of defining scope, checking records, and documenting findings before sign-off.

10Where Claw fits

Claw is an all-in-one legaltech platform for Indian advocates, law firms, and corporate legal teams, combining AI-based case search, an AI legal assistant (Legal GPT), case management, and compliance automation across all Indian courts and tribunals. For legal due diligence before lending, two parts of that combination matter most.

For Step 5, Claw’s case search covers 30 crore+ judgements and 1.5 billion+ records across 25 High Courts (1980 to 2026) and the Supreme Court (1950 to 2026), with AI-based, semantic, and name-tolerant (proximity and phonetic) search built for exactly the kind of inconsistent name spelling that makes manual litigation checks unreliable. This helps a credit or legal team search a borrower, guarantor, or promoter by name across Indian courts from one place, with verified, court-ready citations, rather than checking each High Court’s own portal separately.

For Step 7, Claw’s case tracking covers 8,200+ courts, including tribunals and district courts, with automatic case updates and alerts. Once a borrower, guarantor, or promoter is added to a tracked list, new filings surface without a manual re-check, which is the part of ongoing monitoring that tends to slip once a loan book grows.

Claw does not replace the MCA21, CERSAI, or sub-registrar checks in Steps 2 to 4, or the drafting and stamping work in Step 6, which still need to be done directly against those registries and with legal counsel. Claw does not use customer case documents to train AI models, which is worth noting for a lender evaluating how borrower and case data would be handled.

11Frequently asked questions