SBI to auction seized property worth Rs1,000 crore

Mumbai: State Bank of India (SBI) will auction property worth at least Rs.1,000 crore that it has seized from defaulters in the biggest ever exercise conducted by the country’s largest lender.

The auction on 14 March will put 350 residential and commercial properties across 26 locations in India on the block. The minimum asking price of the real estate will be in the range of Rs.1,000-1,200 crore in total, an executive said.

“We go for auctions on a regular basis but this would be the first time that we are doing such a large auction on a national level,” said Parveen Kumar Malhotra, deputy managing director and group executive, stressed asset management group, SBI.

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.

The auction is being driven by the stressed asset management group at SBI, which is in charge of dealing with troubled loans.

On 31 December, SBI had gross non-performing assets (NPAs) at 4.9% of total loans and net NPAs at 2.8%. While the bank has been successful in arresting the build-up of bad loans in the past four quarters, recoveries and upgrades have been on a downward trend, data available on the bank’s analyst presentation shows.

In the January to March quarter last year, the bank saw recovery and upgrade worth Rs.8,443 crore, which dropped to Rs.667 crore in the October-December period. To be sure, fresh slippages, or new loans turning bad, which were at Rs.7,947 crore in the March 2014 quarter, also fell to Rs.7,043 crore in the three months ended 31 December.

Most banks in India have been struggling with recoveries.

The ratio of recoveries and upgrades to gross NPAs in the December quarter at state-owned banks was 14%, compared with 40% in the June quarter, according to data collated by ratings company Icra Ltd. Gross NPAs at public banks rose from 4.6% of advances on 30 June to 5.1% on 31 December, Icra said in a report on 19 February.

The auction planned by SBI will be concluded online through three e-auction web sites—Magicbricks.com, e-Procurement Technologies Ltd and C1 India Pvt. Ltd.

Most of the real estate on auction will be available at over 10% discount to the market price to the bidders, Malhotra said, adding that an electronic auction helps guard against carterlisation by property dealers, which is a risk at regular auctions and prevents banks from realizing the best price for the assets.

When a bank wants to enforce the Sarfaesi Act upon a delinquent borrower, it sends a notice to the person, asking him to repay the pending dues within 60 days.

If the borrower fails to repay, banks can either take possession of the collateral or immediately auction it to interested buyers. The Sarfaesi Act also allows the bank to appoint a third party to manage the collateral in case it is a functioning unit.

“From a recovery point of view, this seems to be a very cost-effective and transparent move from the bank. If everything goes well and there aren’t too many procedural hassles, this could very well be a trendsetter for other banks too,” said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services Llp, a financial advisory firm.

“It would be interesting to see who finally participates in this, whether it will be individual buyers or real estate developers who will come forth to bid,”

SBI is also looking at selling some bad loans to asset reconstruction companies (ARCs) before 31 March, Malhotra said. He did not specify the amount of bad loans that the bank is looking to sell.

“We will pursue all modes of recovery available to us,” he said.

While this financial year started with a large amount of bad asset sales to ARCs by banks, the momentum has slowed down quite significantly. In the December quarter, ARCs bought assets worth Rs.650-700 crore out of Rs.15,000-20,000 crore worth of bad loans put on sale by banks, according to officials at two ARCs who declined to be named.

In July-September, ARCs had bought Rs.1,500-1,600 crore in bad assets, while these firms purchased bad assets worth Rs.10,000-15,000 crore in April-June, Mint had reported on 20 January.

One of the major reasons behind the drop in sales to ARCs have been the new norms which the Reserve Bank of India introduced in August last year. Under new norms, ARCs have to pay 15% of the price decided upfront, while issuing security receipts for the remaining amount. Earlier, these companies were only required to make an upfront payment of 5%.

“The lack of buying by ARCs has clearly played a part in banks having to go for large auctions themselves,” said the managing director and chief executive officer of an ARC.

“We may see more such auctions by banks, but the importance of ARCs in bad loan management will not be diluted.”