Your bank can auction your property if you default on EMIs

Loan Default and Property Auction

Earlier this week, renowned Bollywood actor Sunny Deol was in the news for reasons other than this hit movie, Gadar-2, a sequel to the 2001 blockbuster Gadar. On August 20, the Bank of Baroda issued a mandatory public notice in prominent newspapers to recover outstanding dues amounting to about Rs 56 crore. Deol had taken loan keeping this property as collateral or mortgage with the bank. The bank invoked the SARFAESI Act to recover the outstanding dues. Subsequently, the notice was retracted, reportedly following the actor's engagement with the bank to settle the dues.

Let's delve into the circumstances under which a bank can auction your property, the associated process, and your rights as a borrower, even if you are a defaulter.

What is the SARFAESI Act, 2002?

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (Sarfaesi Act), 2002, was enacted to help banks and lending institutions recover their dues from defaulting borrowers. According to the Act, when a borrower fails to repay the loan, the lender can take control of the assets allocated as security for the loan without intervention by any court of law. Once the lender acquires the property, it can sell, lease, or assign the rights over the property to another entity. After the sale of the property, the lending institution keeps the outstanding dues and gives the remaining money, if any, to the defaulting borrower.

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The process

The initiation of the auction process occurs when a borrower defaults on the payment of an equated monthly instalment (EMI). "If an EMI of a loan remains unpaid for over 30 days, it is categorised as 'Special Mention Account (SMA) 1.' If this non-payment persists for over 60 days, it's designated as 'SMA 2.' Should the EMIs continue to go unpaid for more than 90 days, the account is then deemed a non-performing asset (NPA)," said Naresh Malhotra, a former senior official with the State Bank of India (SBI), who is currently engaged as a banking consultant.

Keep in mind that when a lender categorises a loan or overdraft (OD) account as SMA or NPA, this information is relayed to credit bureaus such as Experian, CRIF, and CIBIL. Consequently, the credit scores of both the borrowers and guarantors are adversely affected.

A formal demand is thereafter raised on the borrower. In the absence of a satisfactory response, a legal notice can be issued. "Typically, banks convey this through the relationship or branch manager. If there's no satisfactory response, a legal notice is served through a lawyer within two to four weeks of the formal communication," added Malhotra.

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Nonetheless, in cases where a genuine cash flow challenge arises for the borrower, who then furnishes the necessary details to address the concerns, the bankers may extend additional time to facilitate the alignment of payments.

But if the borrower remains unresponsive even after the legal notice, the bank or financial institution can proceed further with the recovery of its dues by taking possession of the mortgaged property. "The process often commences with a notice under Section 13 (2) of the SARFAESI Act, signifying symbolic possession. The subsequent action of getting physical possession under Section 13(4) of SARFAESI is taken after the intervention of the appropriate court of law," said Malhotra.

Once actual possession of the property is secured by the lender, the bank affixes a notice to the property, indicating its ownership. Furthermore, a public notice is published in at least two prominent newspapers, announcing the property's auction on a specified date. This notice also invites objections or claims from the general public concerning the property, with a 14-day window for responses from the date thereof.

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Before proceeding with the auction process, the bank must undertake a valuation of the property through a registered expert valuer to affix a reserve price for the asset, explained Malhotra. The valuation process here is the same as at the time of taking the loan. "This is the same procedure employed at the time of approving a loan against the property, be it as a home loan, construction loan, or loan against property," said Adhil Shetty, Chief Executive Officer (CEO), BankBazaar.com.

Following the valuation of the property, "the lender must issue a public notice in prominent newspapers, both in the local language and in English, announcing the intention to auction the property, along with all the pertinent details, such as the details of the property, the date, time, and venue of the auction, and the terms and conditions of the sale, at least 30 days before the auction. The borrower also has to be informed of the sale notice, and the notice should also be displayed on the property premises," said Shetty.

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Borrowers’ rights

While you have defaulted on making the payment as per the schedule, the law still offers you certain rights.

"Borrowers have the right to be informed and to challenge the auction process if they believe it is not being conducted fairly or according to legal requirements. In some cases, they may even have a right of redemption, which allows them to reclaim the property by paying the outstanding amount along with additional costs before the confirmation of the sale during the auction. However, these may not be as straightforward as perceived, and if you are facing a property auction situation, it is best to consult with legal experts who are well-versed in property and banking laws in the area where your property is," said Shetty.

As far as property valuation is concerned, "the borrower can contest the reserve price and argue that it is not a fair market value of the property," said Santosh Pandey, CEO, Sarthak Advocates and Solicitors.

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Potential disagreements in property valuation between the lender and borrower can arise due to the lender's primary focus on recovering the outstanding dues rather than getting a fair market value for the property.

"Banks, while making the property valuation, consider the age of the loan and aim to recover the dues without risking the sale. Moreover, since the banks cannot profit from distress sales and only cover their dues, the chances of fixing a low reserve price increase," mentioned Pandey.

Therefore, "challenging the valuation report in such cases becomes crucial to safeguard the interest of the borrower as the defaulting person may benefit from the balance returned to the borrower if the bid surpasses the default amount," added Pandey.

While a borrower has the right to voice objections to the lender, if the concerns are not satisfactorily addressed, the borrower can resort to legal recourse. One recourse is to approach the Debt Recovery Tribunal (DRT) to challenge the auction notice. In the event that this challenge proves unsuccessful, the borrower can escalate the matter by appealing to the Debt Recovery Appellate Tribunal. This appeal can be accompanied by a stay application, contesting the auction notice published in newspapers, said Pandey.

Additionally, Pandey highlighted that borrowers have the option to initiate a writ petition in the High Court, contingent on the specifics of the case. This route empowers the borrowers to legally contest various actions taken by the bank and seek judicial intervention. Moreover, by leveraging substantial evidence against potentially unjust tribunal actions, borrowers can approach the High Court. Another dimension involves the filing of interim applications aligned with Reserve Bank of India (RBI) guidelines, allowing borrowers to seek interest waivers. Overall, these strategic steps are aimed at upholding fairness and preventing undue hardship for the borrowers facing default situations.

While avenues exist to contest the bank's auction proceedings, a prolonged defense without fulfilling outstanding dues might prove challenging. Exploring alternatives such as repayment, partial payments, or loan restructuring is advisable for a more proactive resolution.