Introduction
The SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act), 2002, grants banks and financial institutions the power to auction properties, such as residential, commercial, or industrial, in the event of borrower defaults. This process allows banks to recover the unpaid loan amount by selling the mortgaged property, without involving the courts. Below is a step-by-step breakdown of the SARFAESI property auction process, and essential considerations for both buyers and borrowers.
1. Identification of Loan Default
When a borrower defaults on their loan—typically after missing three consecutive payments—the bank classifies the loan as a Non-Performing Asset (NPA), as per RBI guidelines. A loan becomes an NPA if the interest or principal remains unpaid for more than 90 days.
2. Issuance of Demand Notice
Once classified as an NPA, the bank sends a demand notice under Section 13(2) of the SARFAESI Act. The borrower is given 60 days to settle the outstanding loan. This notice clearly states the intention to seize the property if the loan remains unpaid.
3. Possession of Property
If the borrower fails to repay or negotiate within 60 days, the bank proceeds to take possession of the property. Under Section 13(4) of the Act, the bank issues a possession notice, either taking:
- Physical Possession: The bank physically takes control of the property.
- Symbolic Possession: The bank holds the legal title, but the borrower or tenants may still occupy the property.
4. Valuation of Property
The bank appoints an independent valuer to determine the fair market value of the property. This assessment considers factors like the property’s location, condition, market demand, and legal clearances. The valuation report helps set the reserve price for the auction, which is the minimum bid amount.
5. Public Notice of Auction
The bank issues a public notice of the auction in two leading newspapers (one in the local language and one in English), detailing:
- Description of the property.
- Auction date and time.
- Reserve price and earnest money deposit (EMD) details.
- Borrower’s loan status.
- Contact information for inquiries.
This public notice is usually published 30 days before the auction date.
6. Earnest Money Deposit (EMD)
Interested buyers must submit an EMD, typically 10% of the reserve price, to participate in the auction. The EMD can be paid via demand drafts, electronic transfers, or other bank-approved methods. The EMD is refunded to non-winning bidders.
7. Conducting the Auction
Auctions are held offline or via e-auction platforms managed by the bank. E-auctions allow bidders to participate from any location. During the auction, participants bid higher amounts than the reserve price, and the highest bid wins.
8. Winning the Auction
After winning the auction, the bidder must pay 25% of the winning bid amount (including the EMD) within 24 hours. The remaining 75% must be paid within 15-30 days. Failure to pay the full amount results in forfeiture of the EMD, and the property may be re-auctioned.
9. Issuance of Sale Certificate
Once full payment is made, the bank issues a Sale Certificate to the successful bidder, legally transferring the ownership. The buyer must register the sale certificate with the local sub-registrar’s office to complete the property transfer.
10. Possession of Property
After the sale certificate is issued, the buyer can take possession. If the bank had taken symbolic possession, they assist the buyer in obtaining physical possession, even if the property is occupied by the borrower or tenants.
11. Use of Sale Proceeds
The sale proceeds are used to clear the borrower’s outstanding loan, interest, penalties, and legal fees. If the proceeds exceed the loan amount, the surplus is returned to the borrower. Conversely, if the auction falls short of covering the debt, the bank may pursue legal action to recover the remaining balance.
Important Considerations for Buyers
- Legal Due Diligence: Buyers must thoroughly verify the property’s legal status, ensuring clear title and checking for encumbrances.
- Property Inspection: Conduct a physical inspection of the property to assess its condition.
- Loan Financing: Banks may offer loans to auction participants, but these loans often have stricter terms and conditions.
Conclusion
The SARFAESI property auction process offers a structured way for banks to recover dues while providing opportunities for buyers to purchase properties, often at a discount. However, buyers must perform careful due diligence to avoid any potential legal issues after the purchase.
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