Loans disbursed against mortgages are standard in banks. Banks authenticate the properties mortgaged by a borrower to reduce the risk of spending a lot of money. A borrower needs to pay back the loan amount in installments. After the constant failure to pay EMIs, the borrower is a defaulter.

“In financial year 2021, public sector banks in India reported a total of over six trillion Indian rupees in gross non-performing assets (NPA). This was a decrease from the 7.3 trillion Indian rupees in 2019. In contrast, private sector banks reported an increase from 1.8 trillion in financial year 2019 to two trillion Indian rupees in financial year 2021 in gross NPAs.

 

Non-performing assets are also referred to as "bad assets". They consist for example of non-performing loans, which are unlikely to be repaid in full by the borrower. NPAs pose a challenge to banks because they reduce the profitability as well as the liquidity of banks.”

The asset kept as a mortgage is a non-performing asset (NPA). To retrieve the money lost in loaning, the banks often sell NPAs in auctions. Let us find out how auctioning properties can benefit banks and buyers.

 

Benefits of auctioning NPAs for banks

An increased value of NPAs is a liability for the banks. By selling the properties through public auctions, capital gets recovered from the market. A bank is eligible to sell NPAs without the intervention of courts, as per the SARFAESI Act 2002.

The benefits of auctioning NPAs for banks are:

1. Banks can autonomously make decisions and sell the properties entitled as mortgages for loans.
2. When a borrower fails to meet the terms of loan repayment as per a bank’s agreement, the bank can sell the property kept as a mortgage to retrieve its money.
3. It seldom happens that auction properties generate returns bigger than the loan amount after several years of the loan repayment failure. Hence, NPAs often become a significant investment for banks that offer better returns in the future.
4. Banks can also use other recovery methods to retrieve capital from the market by using the NPAs.
5. Banks can sell these assets directly as they are the legal owner of the mortgaged assets and can make decisions accordingly.

 

Benefits of buying auction properties from banks

As mentioned earlier, banks want to eliminate the overwhelming volume of NPAs to retrieve capital from the market. Buyers often show high interest in buying such properties for the following benefits.

1. Low competition due to the minimum bidding value set by the banks and the earnest money deposit (EMD) that a bidder has to deposit makes competition less and offers excellent opportunities for investors.
2. The banks validate the mortgaged real estate properties before disbursing loans to borrowers. Hence, an interested buyer will not have to authenticate a property as it has already been done.
3. The entire process is done publicly with no discrepancy in the auction system. Anyone meeting the criteria can become a bidder and participate in the process. The deposited EMD value is returned when one cannot get hold of an NPA. Hence, once a tender is closed, and the auction is complete, EMDs are returned to all bidders.
4. Identifying and investing in authentic properties with such processes is easy.
5. Extreme convenience of paperwork when a bank is involved in the process of property name transfer is also a huge benefit.

These are the benefits of auction properties for both banks and buyers. Property auctions have been a very effective way for banks to reduce the stress in their books and for prospective buyers to own a home at discounted rates. All interested bidders must engage in a legal title search of the property. This process helps them verify the validity of critical documents.