Ramesh Luhani had been house-hunting for over a year. He had met over a dozen brokers and negotiated with several builders but was not able to strike a good deal until he chanced upon an advertisement by a bank inviting bids for an e-auction. He won the bid and even managed to get a 10% to 15% discount on the property, but there were crucial details that he had overlooked. A month after moving in, he was horrified to find that the previous owner owed the housing society Rs. 5 lakh in dues and that the house had been sub-let, which meant he could not resell the property.
Luhani’s case cleary proves that properties bought in e-auctions are sold at an ‘as is where is basis’ and most of them are offered at a discounted price of 10% to 15%. Banks are most likely to offer a discount because of the problems associated with non-performing assets (NPA). Though they do their own due-diligence, often the property might have some liabilities which have gone unnoticed.
At a recent e-auction, the State Bank of India (SBI) was able to sell 124 (out of a total of 350) properties seized in 26 cities worth Rs. 90 to Rs. 100 crore, says Parveen Kumar Malhotra, deputy managing director, Stressed Asset Management Group, SBI. Most of these properties were residential and were bought for end use. The total value of the 350 residential and commercial assets up for sale ranged between Rs. 1,000 and Rs. 1,200 crore.
These properties were pledged as collateral for housing and other business loans and were taken over by the bank under the Security and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act due to non-payment of pending dues by the borrowers, he explains. The defaulters were given a notice period of 60 days under the Sarfaesi Act, after which the properties were seized and auctioned.
“If the borrower fails to honour the loan, we start the legal process and repossess the property and later sell it at an e-auction. We have empanelled valuers who keep the construction, location and the area in mind before valuing the property. The plausible value given by them helps us set the reserve price which is disclosed to the bidder beforehand. Those interested in the bid have to deposit an initial amount of 10%to 15% of the value of the property. After verification of their know your customer (KYC) documents, a digital signature is given to them to allow them to participate in the e-auction,” he says.
But do banks make a profit from e-auctions? The intention of organising an e-auction is to recover the amount due from the borrower and in case the bid amount is more than the outstanding amount, the margin is returned to the borrower.
Buyers can even avail of a loan for such properties. “While no loan can be availed for the initial deposit, the remaining amount can be taken as a loan from a bank and is like any other housing loan,” he adds.
“The recent e-auction only goes to prove that there are enough buyers in the market who are waiting to buy ready-to-move-in properties available at the right price. Most of these units have minimal development and approval risks associated with them. Banks generally do the due-diligence for these properties themselves through their asset reconstruction departments or sell the ‘bad loans’ to asset reconstruction companies who derive monetary value out of these ‘dead’ assets. However, they do not give any warranty and the buyer has to bear any unknown risks associated with it,” says Anckur Srivasttava of GenReal Advisers.
What explains the discounts that are offered in e-auction? Discount is a function of problems associated with such assets. There could be some liabilities associated with the property that is being auctioned. These could include society dues and other liabilities unknown to the lenders. There is always a deficit in information and the discount on offer is due to that. On an average such properties sell at a discount of 15%, says Siby Anthony (CEO- ARC) Edelweiss Financial Services.
Banks get the premises vacated before they are auctioned and have to get possession of the house through a collector or a district magistrate to avoid any law and order issues.
Since those bidding for the property in an e-auction are allowed to inspect the property, they should check from the society if there are any dues pending against the property in question. There could be cases of subletting that may not be known to the bank. If that is the case, the buyer who purchases such a property will not be in a position to sell without the tenant’s approval. Sub-tenancy can create its own share of problems. No buyer will know that until he actually goes and resides in that property, he adds.
Recovery of bank dues
If the borrower defaults on his loan for six continuous months, he is given a 60-day notice period but if he still fails to repay, banks issue another 30-day notice period. In case the borrower does not pay even during this period, his loan is declared part of the bank’s non-performing asset (NPA). These properties are auctioned to recover losses under the Sarfaesi Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002).
Properties are valued by a professional valuer before the auction. The valuation is generally conservative as banks only try to recover the amount that is outstanding.
Banks are not allowed to pocket gains from a distress sale except to recover their dues and if the bid amount is higher than the amount of the loan default, the remaining amount will have to be paid back to the defaulting borrower.
It is generally a distress sale because the aim behind holding the bid is primarily to recover the partial amount of the property. The market price of the property in the area will always be higher than the value at which the bank had loaned the property.
Those interested in a property, submit their bid to a bank along with a minimum deposit which is a certain percentage of the reserve price. This amount is refundable in case the bidder decides to withdraw or does not win.
If the bidder wins, he pays the 25% of the bid amount to confirm the purchase and the remaining amount in the next 10 to 15 days. He can avail a loan for such a property.