Bank-auctioned homes may be cheaper

Watch out for any unpaid dues, taxes and society bills the previous owner could have defaulted on
Yogini Joglekar  |  Mumbai  April 21, 2013 Last Updated at 21:27 IST

Shashi Nair, a Mumbai-based advocate, bought two houses in Chembur and Vasai in 2005 and 2010, respectively, through two different bank auctions. Nair purchased these properties from banks that opted to take recourse under Section 101 and the Debt Recovery Tribunal (DRT) Act.

The most common Acts under which banks take recourse are the DRT, state-specific Co-operative Housing Societies Act, and the Sarfaesi (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act.

The Sarfaesi Act, 2002, allows banks and financial institutions to auction properties (residential and commercial) when borrowers fail to repay their loans.

It helps banks reduce their non-performing assets (NPAs) by adopting such measures for recovery.

According to NPAsource.com, the net NPAs of 40 listed banks rose to Rs 92,398 crore in December 2012 from Rs 61,558 crore in March 2012. There were about 23,000 registered properties for auction, worth Rs 21,000 crore. Of these, 8,548 residential flats and 1,846 commercial properties are up for auction.

Ram Sangapure, general manager at Central Bank, says, "Most banks today recover their NPAs under the Sarfaesi Act, as it is faster, hassle-free, and empowers banks to do so without the intervention of the court."

Sanjay Dutt, executive managing director, South Asia, Cushman & Wakefield, says, "Usually, houses bought under the Sarfaesi Act are up to 15-30 per cent cheaper than the prevailing rates of homes in that area. This is because demand for such homes is low, as very few people know about this channel and also banks don't stress on a high price as long as they can recover their losses." Buying through this channel saved Nair as much as Rs 8-10 lakh than the prevailing rates in those areas. Valuations of bank-auctioned homes tend to be on the conservative side, as it is a distress sale.

Properties under Sarfaesi Act
If the borrower defaults on repayment of his/her home loan for six continuous months, banks give the borrower a 60-day period notice to regularise his repayments. If the borrower fails to do so, banks will issue another 30-day period notice. If the borrower doesn't pay even in this period, his or her loan would be declared an NPA. This is when banks will auction his mortgaged property to recover their loan.

Bank issues notice about possession
If the borrower still fails to repay the loan, the bank will take possession of the property that has been kept as mortgage or collateral. The bank can take the help of the police in case the borrower doesn't part with his property. After the property is under its possession, the bank will issue a notice in newspapers. This is when potential buyers should prepare themselves and wait for bank's auction-notice.

Wait for the auction-notice
The bank now hires a government-appointed valuer, who will value the property and arrive at a reserve price (RP) or a minimum bid price. It is a price below which the bank is not allowed to sell that property. If the price fetched exceeds the bank's dues, the excess amount is given to the borrower. Only after arriving at the reserve price, will banks advertise auction-notice. They can publish this only in one English and one regional newspaper, 30 days prior to the auction.

Since information about such notices is limited, one can also look at websites like foreclosureIndia.com and NPAsource.com. These portals give information about the latest properties that are up for auction by banks. However, to register on NPAsource.com, you will have to shell out Rs 18,000 annually to view some 1,000 NPA notices in a year across India.

How to participate in the auction
Interested bidders must submit their bids in a sealed envelope to the bank. Along with the bid, the bidder has to pay 'earnest money deposit'. This deposit is usually 5-10 per cent of the value of the property auctioned. However, this deposit will be refunded in case the bidder doesn't win the bid. Some banks may also charge a nominal fee as tender fees. On the auction day, the sealed envelopes are opened in front of the bidders and the highest bid is announced.

Bidders may or may not get another chance to revise their bids. If the bank has failed at achieving the reserve price, they may postpone the auction or even reduce the valuation of the property. This revision may take another two-three months.

What if you win the bid?: 
You have to pay up to 25 per cent of your bid amount within 24 hours to confirm the purchase. The balance amount can be paid in a month or two. This time period given to the buyer varies from banks to banks.

R K Bansal, executive director (retail banking) at IDBI bank, says, "If the property value is huge, the buyer can negotiate with the bank and discuss the tenure within which he can pay the balance amount. The buyer can also get loan to buy that property, if he has a decent credit score."

Since the bank had previously lent against the property, there is clarity on property title. However, these properties are sold on an 'as-is' basis, which means the properties are sold just the way it had been possessed.

"Since the property has been possessed by the banker forcefully, there are chances there may be pending dues or even litigations. For instance, the owner may have some unpaid property taxes, electricity/water bills, society dues and so on. Hence, don't get carried away by the low price of the house, there are chances you may have to pay for such liabilities," says Anshuman Jagtap, advocate at Hariani & Co.

Banks may or may not have information about such liabilities, so it's best to hire a property lawyer and check for such loop-holes before finalising the deal.

http://www.business-standard.com/article/pf/bank-auctioned-homes-may-be-cheaper-113042100495_1.html

Credit Unworthy

Ill-behaved Indian borrowers will now find it tough to hide from authorities

One morning, two years ago, when the officials of the Asset Reconstruction Company of India Ltd (ARCIL), which buys and sells bad loans acquired from banks, turned up at a Bangalore housing complex to repossess a defaulter's flats, they were nonplussed. The defaulter's tenants - a police inspector, a politician and a small-time businessman - were all influential. One had removed all the locks on the outside of the front door. Despite the backing of an order from the chief metropolitan magistrate and a team of cops, the ARCIL officials could do little but request the tenant to open the door. Morning passed into afternoon, and finally the police decided to smash in the door. Alarmed by the noise, the tenant finally opened it. The second tenant threatened the ARCIL team with dire consequences. The third threatened to commit suicide. "We persisted with our request for the lease agreements executed by the defaulting borrower," says an ARCIL official. But the tenants cited the law to prevent the officials from entering the flats. After much discussion, the tenants sought 10 days to find other accommodation, and promised in writing to vacate.

The story did not end there.

"We granted them the time, as the police also advised us," the ARCIL official said. But the very next day, the tenants obtained a temporary stay on the repossession order, from the debt recovery tribunal. The ARCIL officials are still doing the rounds of the court to repossess the flats.

There is no dearth of stories about defaulters using every means possible to scuttle the legal process. A jewellery exporter offered disguised copper alloy as part of the collateral for a loan, and later sued the bank for his 'missing' gold. In another case, ARCIL had to arrange a contingent of 200 policemen and private security guards to repossess a textile manufacturing company's factories.

"We end up getting the most difficult borrowers," says P. Rudran, Managing Director and CEO, ARCIL. Bankers tend to sell whatever they cannot recover on their own, he explains.

The concept of focused asset reconstruction companies for the recovery of non-performing assets (NPAs) was born in early 2000 to help banks. The 63-year-old Rudran, who operates from a tenth-floor office in a suburban Mumbai tower, has his work cut out, judging by the mounting NPAs in the banking system.

Arun Thukral, CEO of credit tracker CIBIL, at Mumbai's busy Churchgate station. He says: 'A bad credit history can mean trouble. If fresh loans won't go to bad borrowers, it naturally improves the credit culture.

Gross NPAs are expected to touch 3.5 per cent, and corporate debt restructuring, 5.7 per cent, of total advances in the banking industry in 2012/13. Loans and advances in the system stood at Rs 50.74 trillion (a trillion equals 100,000 crore) in 2011/12. 

Rudran's ARCIL so far has bought nearly Rs 50,000 crore worth of NPAs in the past decade.

"No one borrows money to default, and not all NPAs are wilful defaults," says S. Ravi, who runs a chartered accountancy firm in South Delhi, and also sits on the board of IDBI Bank Ltd. "You have to separate the wheat from the chaff," he adds.

Ravi's argument can be justified, as even good borrowers can get trapped in NPAs because of ups and downs in the economy, a sudden rise in interest rates, inflation and other reasons beyond their control.

But Indian borrowers can be reckless, too. The track record suggests that a part of stressed assets turns into wilful defaulters. The value of suits filed against defaulters has more than doubled in five years to reach Rs 23,439 crore in 2011/12. 

The alarming trend of borrowers disposing of assets prompted the Reserve Bank of India (RBI) to expand the definition of 'wilful defaulter'. Before 2008, it simply meant someone who had the capacity to repay, or who diverted or siphoned off borrowed money. Now, the definition includes promoters who dispose of collateral assets without the knowledge of the lending bank.

Another symptom of bad credit behaviour is the over four million cases of bounced cheques - mostly retail - pending in the courts. The volume of bounced cheques is equivalent to the volume of cheques issued every month in a city the size of Ahmedabad, Bangalore or Kolkata.

Do Indians have a cavalier attitude towards timely payment ? Some in the industry believe so. For example, global credit insurer Atradius, present in India for well over a decade, has documented payment delays in the country, and found that business-to-business payment delays of more than three months stood at 8.4 per cent of domestic invoices in November 2012 - well above the Asia average of 5.5 per cent. And the value of uncollectable (written off) business-to-business receivables was 7.5 per cent in India, compared to the Asia average of 5.3 per cent.

This would make any foreigner hesitate to do business with Indian promoters. "We have seen delays in the IT sector or amongst the small and medium enterprises," says Arun Rajan, country manager, Atradius.

This bad payment habit extends to bank loans. Even some young borrowers, such as students, default, in their first relationship with a bank. Today, gross NPAs in education loans are over seven per cent of advances. As that number is rising, banks are going slow on education loans. Former finance minister Pranab Mukherjee had even proposed a credit guarantee fund to compensate the banks, but it never materialised for lack of budgetary allocation. RBI Deputy Governor K.C. Chakrabarty highlighted the problem of student loan defaults during a lecture at the Noida-based JRE School of Management last year. "I suggest school alumni associations should become active in inculcating ethics and values among students," he said.

Sudip Bandyopadhyay, former CEO of Reliance Money, who now runs a firm called Destimoney Securities Pvt Ltd, says students are not mature borrowers. "Also, many times, the placement is not commensurate with the money spent on a course," he says.

Bankers say students sometimes leave the country without paying up. "We don't have a good tracking system - it is still evolving," says IDBI's Ravi. Some experts suggest that banks could reach out to such defaulters through their parents or by coordinating with immigration authorities.

Another area where borrowers often behave erratically is credit cards. Bankers have turned extremely cautious here: RBI data shows that the number of credit cards actually fell from 23.1 million in March 2007 to 17.7 million in March 2012. Card spend has, however, increased from Rs 41,400 crore to Rs 96,600 crore. "It is better to have a few good customers than many bad ones," says Bandyopadhyay of Destimoney. Bankers say nonsalaried people with an irregular income are more likely to default.

Foreign banks and their non-banking arms, too, have had bitter experiences in consumer finance after the economic downturn in 2008. Fullerton India, a non-banking finance company (NBFC) backed by Singapore-based Temasek Holdings, started with a nearly 90 per cent unsecured lending portfolio around five years ago. It suffered huge losses in the unsecured segment, with gross NPAs rising to over 10 per cent in the overall business. Since then, it has cut its exposure to half in the unsecured segment, especially personal loans.

The only disciplined borrowers, data suggests, are mortgaged borrowers. "We haven't seen people not paying up on a home or car loan in India," says Arun Thukral, CEO of the 12-year-old Credit Information Bureau (India) Ltd, or CIBIL. The bureau keeps records of all banks' borrowers, assigning each a credit score between 300 and 900, where 900 indicates the best repayment behaviour. The score helps a new lender assess the credit behaviour of an individual or company.

Thukral points out that Indians are not as leveraged as borrowers in the US or UK, but adds that credit tracking infrastructure is well developed in those countries, recovery mechanisms are more robust and borrowers are mature enough to admit to mistakes. "Post-2008, we all heard the stories of people leaving their cars on the road or abandoning their well furnished flats for bankers to repossess," says Bandyopadhyay. ARCIL's Rudran says he is not hopeful of such behaviour in India any time soon.

The lack of credit tracking infrastructure in India until recently has contributed to borrowers' lax attitude towards financial obligations. "There was always another bank ready to welcome you with open arms," says a banker who does not want to be named.

CIBIL is still struggling to rope in many institutions to get a better picture of credit behaviour. Four leading cooperative bank associations in Maharashtra joined CIBIL 10 long years after it was set up. "Politicians sell the loan waiver carrot, advising farmers not to repay banks," says an NBFC official who travels extensively in rural India. Banks are wary of lending to farmers as this segment has a history of default.

Sanjay Agarwal, group head for retail business at ARCIL, says there is a tendency in India to resort to litigation to scuttle the recovery process. For instance, he says, as soon as ARCIL buys an NPA from a bank, the borrower approaches the court, challenging the asset transfer.

"There are cases that are unresolved for more than eight years," says ARCIL's Rudran. "Asset recovery is a very tough business. You have to find out new methods to deal with rogue borrowers." He adds that defaulters often make all sorts of excuses and try to stymie the recovery process by approaching the courts.

"The borrower also uses indirect pressure from influential people," says a banker in the NPA department of a public sector bank who has received many calls from politicians. Deepak Gupta, Joint Managing Director, Kotak Bank - one of the few banks that specialise in buying NPAs from other banks - concurs, saying: "Most corporate default cases get resolved only through courts."

P. Rudran, MD & CEO, ARCIL, at the Bombay High Court, where many default cases are heard. He says: 'Some cases are unresolved for over 8 years. Asset recovery is a tough business. You have to find new ways to deal with rogue borrowers.' (Photo: Nishikant Gamre)

The courts are flooded with such cases. Take, for example, litigation between companies and banks over forex derivatives contracts. Many midsize exporters and importers who hedged their foreign currency risk suffered losses when the rupee-dollar rate moved beyond their comfort zone. Companies that had foreign currency exposure blamed the banks for mis-selling, and banks countered by saying the companies had failed to read the fine print. In November last year, the Supreme Court settled the wrangle by ruling that 'wilful default' covers not only normal banking transactions such as borrowing and lending, but also derivatives contracts. The borrowers lost, and bankers can now go after defaulters in derivatives contracts.

Another reason for bad behaviour by borrowers is the multiplicity of lenders. Apart from banks, there are NBFCs of varying shapes and sizes, microfinance institutions, district cooperative banks and regional rural banks and unregistered sources. At a recent seminar, Anand Sinha, another RBI Deputy Governor, cited the example of Andhra Pradesh, where microfinance institutions lent indiscriminately. "This would not have reached the proportions it did if there was information-sharing amongst MFIs," says Sinha.

CIBIL's Thukral says the bureau is gradually helping improve the credit culture, as more and more people are aware that a bad credit history can mean trouble. Banks put credit bureau reports at the top of their checklist. "If fresh loans won't go to bad borrowers, it naturally improves the culture," says Thukral.

With the role of credit reports becoming more important, some see a business opportunity. Two Mumbai-based entrepreneurs have set up Credit Sudhaar, a startup that offers advisory services to improve one's credit score. "Our clients are not only those who made a mistake in the past, but also those who want to maintain a good credit score," says co-founder Arun Ramamurthy, who formerly worked with Citibank.

CIBIL's Thukral says it is a reflection of growing awareness that hassled borrowers sometimes walk in or call CIBIL's helpline to discuss negatives in their report. "The cultural fabric of India is very different from the West," says Thukral. "Our parents and grandparents keep reminding us: jitni chadar ho utnay hi paon phelane chahiye (stretch your legs only as far as your blanket will go)."

Today, the CIBIL effect is not restricted to borrowing . A European bank in India, for example, requires job applicants in India to submit credit reports before it offers them a job. A professional who works for a private company and does not wish to be identified, said his friend was asked for a credit report when he approached Delhi Public School for admission for his daughter.

The possibilities for rogue borrowers to hide are shrinking. Taking the locks off a door or moving to another city won't work much longer. Time to check your credit score.

The problem with bad loans

The health of the banking sector is deteriorating. India needs robust insolvency laws

Sunil B.S.   First Published: Thu, Aug 23 2012. 07 30 PM IST

pdated: Thu, Aug 23 2012. 07 36 PM IST

The sharp economic downturn has once again brought the problem of bad loans to the forefront.

In its annual report released on Thursday, the Reserve Bank of India (RBI) pointed out that the health of the banking system is linked to the credit cycle. “Financial institutions tend to overstretch their lending portfolio during economic booms and tend to retrench the same during economic downturns,” it said.

The market is often abuzz with speculation about the inability of some overleveraged business groups to service their bank loans. India has traditionally had a system that tries to help companies in financial distress, making it easy for them to restructure loans. Even RBI has pointed out that the ability of Indian banks to maintain asset quality is “partly on account of the policy of loans restructuring”.

While bad assets of Indian banks have grown 46% in the fiscal year ended March 2012, the growth pace of credit has been at 17%. On 31 March, gross non-performing assets (NPAs) of the banking system amounted to Rs.1.37 trillion and restructured assets Rs.218 trillion.

To reduce the adverse effects of economic downturns on companies and lenders, corporate debt restructuring (CDR) was introduced by RBI in 2001. Despite success in helping companies emerge out of financial troubles, there are several shortcomings in this mechanism. India continues to miss strong insolvency laws.

Restructuring often involves extension of maturities, lower interest rates, debt forgiveness, among others, in case a firm is unable to repay its debt. Further, loans may or may not get classified as NPAs after they are restructured. A working group set up by RBI to review existing guidelines on loan restructuring has recommended increasing the provisions for accounts which get the asset classification benefit on restructuring. Hence, such restructuring places huge stress on the resources of banks

Such restructuring has also attracted criticism about being partial towards big companies. RBI deputy governor K.C. Chakravarty, in a recent speech, raised an important question: Are small and marginal borrowers discriminated against by the banks? An economic downturn is likely to affect smaller companies more adversely than larger ones, so smaller borrowers should be having a greater share in restructured accounts. The data with RBI does not show this.

The soft corner which Indian banks have for large companies is also highlighted by a recent report by Credit Suisse Group AG, which pointed out that the exposure to 10 large industrial groups constitutes 13% of the entire Indian banking system’s loan assets.

In the absence of effective laws on insolvency, many firms who can’t repay their debts for reasons beyond their control remain orphans, and banks are forced to restructure their loss-making assets at a cost. The Sick Industrial Companies Act (SICA), 1985, enabled sick firms to approach the Board for Industrial and Financial Reconstruction (BIFR) to help them revive.

Under the SICA provisions, a company is classified as sick if it has a track record of erosion of net worth over five years. But what is required is a law, which can detect that a company is going through financial difficulty in earlier, and then attempt to revive it. The lack of infrastructure has resulted in bankruptcy procedures under BIFR to take a long time, something which needs to be addressed. Also, steps should be taken to prevent misuse of BIFR provisions by companies that, under section 22 of SICA, seek immunity from creditors after cooking their accounts; this has plagued efficiency at BIFR for long.

Also asset reconstruction companies (ARCs), which were established by the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, to acquire, manage and recover illiquid loans or NPAs from banks have failed to take off in a big way. The appetite of Indian investors for securities issued by ARCs is weak, and remains limited to short-tenor papers and those with high ratings. A major hindrance in the way of development of securitization in the country has been high stamp duties. Moreover, the Indian credit markets are closely regulated and loans typically don’t trade on a secondary market, unlike developed countries.

These laws are also tilted in favour of creditors whose major goal remains short term, which is to recover their debts. What is needed are sound insolvency laws in our country along the lines of chapter 11 in the US, which can protect firms and help them adopt a suitable strategy to emerge out of financial difficulties.

http://www.livemint.com/Opinion/FF0FFDxOooUbUDEcAWDHmI/The-problem-with-bad-loans.html

http://foreclosureindia.com/

Help to speed up NPA recovery, Pranab tells DRT chiefs

 SPECIAL CORRESPONDENT, THE HINDU

Problem of increasing NPAs has to be addressed on a priority basis.

                   

Finance Minister Pranab Mukherjee, on Wednesday, asked chiefs of debt recovery and appellate tribunals to suggest ways and means of expediting the release of bank resources locked up in the form of NPAs (non-performing assets). 

Addressing the first conference of chairpersons of DRATs (debt recovery appellate tribunals) and presiding officers of DRTs (debt recovery tribunals) here, Mr. Mukherjee pointed out that there could be no fresh lending unless there was recovery of earlier loans and, therefore, the problem of increasing NPAs of banks had to be addressed on a priority basis.

Even as the government has advised banks to closely monitor their NPAs, Mr. Mukherjee argued that the role of DRTs was all the more important as they were the part of mechanism for recovery of loss of assets by banks by way of bad loans.

Asking the tribunal chiefs to come out with ‘concrete suggestions' to improve their functioning and help in speedier recovery of bank debts, Mr. Mukherjee noted that the conference was being held at a time when the Indian economy was faced with various challenges.

In the event, although the slowdown in the GDP growth rate, coupled with the widening fiscal and current account deficits were a matter of concern, there “is no need to press the panic button as he has full faith in the capacity and abilities of our people as well as in the resilience of the Indian economy to overcome successfully such challenges.”

Highlighting the positive aspects of the economy, Mr. Mukherjee asserted that with strong basic fundamentals and high rate of domestic savings and investment, along with a reversal in the tight monetary policy, among others, taking the economy back to the path of higher growth, maintaining a moderate rate of inflation, narrowing the current account deficit and restricting the fiscal deficit to two per cent of GDP were much achievable.

The Finance Minister also argued that it was on account of the well-placed regulatory mechanism and effective functioning that banks were not adversely affected by the international financial crisis.

On the contrary, the role of banks was such that they helped in minimising the impact on the economy. In such a scenario, the role of DRTs “is all the more important in helping out the banks to deal with mounting NPAs/loss assets,” as DRTs could ensure effective and speedy recovery of public money.

Keeping this important aspect in view, as per the relevant legislation on recovery of dues, the endeavour of tribunals should be to decide cases in 180 days, but the DRTs had not been able to adhere to this time line. Mr. Mukherjee said the pendency of cases in tribunals was about 67,000 cases, involving an amount of Rs. 1.36 lakh crore as on March 31, 2012. “This is a matter of great concern,” he said.

http://www.thehindu.com/business/article3498324.ece?homepage=true