The finance ministry has initiated this step to eliminate any chances of side-deals being done by bank officials in connivance with the property dealers. Public sector banks have been told that they can do only e-auctions to sell properties as per the provision of the SARFAESI Act. There will be no physical auction of mortgaged properties. This eliminates all chances of side deals, a senior official familiar with the matter said.
There have been instances where bank officers sell mortgaged properties of customers who default on repayments to select real estate players below fair value. Thereafter, the property is sold by real estate dealer in the market at a higher price, with the extra margin being ditributed between the dealer and the bank officials.
Under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002, banks and financial institutiona are allowed to auction properties (residential and commercial) when borrowers fail to repay their loans. It helps banks in reducing their non-perming assets.
If a home loan borrower defaults on repayments at a six month stretch, banks give a 60-day period to to the borrower to regularise the repayment.
In case the repayment doesn't happen, the loan is declared as non-performing asset (NPA) and it is auctioned by the bank to recover the debt. In the physical auction, banks set a minimum reserve price and accept bids from interested parties in sealed envelopes. The property is sold to the highest bidder.
To remove the discretion available to the bank officials, the government has asked banks to conduct e-auctions. State-owned banks have already started listing the properties being auctioned at the central public procurement portal www.eprocure.gov.in.
As per the finance ministry's directions, the auctioning bank will have to take into account the borrowers dues to the other financial institutions as well. The bank will make remaining payment to the borrower after dues of all financial institutions are recovered, the official said.