THE GREAT NPA SALE
Properties sold by banks through e-auctions need thorough due-diligence or buyers could get stuck with unclear legal titles
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 ₹ 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 t hat properties bought i n 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 ₹ 90 to ₹ 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 commer- cial assets up for sale ranged between ₹ 1,000 and ₹ 1,200 crore.
T h e s e p r o p e r t i e s we r e 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
he idea of an India dotted with smart cities has tremendous appeal. We all aspire to live in futuristic metropolises where smart planning and cutting-edge technology converge to eliminate distances, multiply convenience, reduce pollution, and create a safe and sustainable environment for all. Set against the backdrop of India’s gradual urban migration, and the potential of such cities to generate greater levels of economic activity and better standards of living, there has been a strong advocacy for smart cities for quite some time.
And India’s experiment with the concept has begun, albeit on a tentative note. The government has announced plans to build 100 smart cities across India and various projects are purported to be in the pipeline. The time is now ripe to ask some ‘big questions’.
Some of these questions are – why do we need smart cities? How exactly are they different from regular cities? And most importantly, how should we go about planning, financing and building them to achieve the desired goals?
It is estimated that half of India’s population by 2050, or over 800 million people, will live in urban areas. Experts estimate that we need 500 new cities by then to accommodate this enormous population. These cities need to be exponentially better than our current big cities, which are poorly planned, bursting at the seams, and offer low standards of living to the vast majority.
They also need to promote commerce, sustainability, seamless communication and technology-enabled governance. Smart cities, by definition, include all these features. Considering that India will account for a large chunk of the global population by 2050, we need advanced cities that will translate our demographic advantage into economic and social advantage as well.
With that vision in mind, the Union government has allocated ₹ 70.6 billion for smart cities in Budget 201415. This is a fraction of the trillion-dollar investment that experts say would be required over the next two decades to build flourishing urban centres. However, it’s still a beginning, and the success of the concept in India will hinge on how well the first few smart c i t i e s are received by stakeholders.
Smart cities are a great concept, but in India, they are an extremely complex proposition, given the socioeconomic realities today. Getting all stakeholders on board will not be an easy task, and there exist several roadblocks, not the least of which will be financial.
However, by doing the required homework, regularly tracking progress and making authorities accountable, India could forever transform its cityscapes into ultra- modern living and working spaces. 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 readyto-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.