Madras High Court has passed a judgement that e-auction of Non Performing Assets (NPAs) will not be challenged, reports The Economic Times.

Note that the Ministry of Finance had made it mandatory for all commercial banks to move from physical auctions to e-auction mode for all NPA cases under the Debt Recovery Tribunal a while back. The court judgement was for a writ petitions brought up by a slew of borrowers such as the Tamil Nadu Organic, Gangtori Textiles, Yoga Nectar Ayurceuticals and D R Logistics Pvt. The petitions were against the State Bank of India, the Central Bank of India, the Indian Bank, the Union Bank of India, other public sector banks and the ICICI Bank.

The petitioners had argued that under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFEISI) Act which deals with bad loans, does not allow e-auction while it permits public auction, due to which  e-auction should be considered illegal. The petitioners also claimed that there was no transparency in the e-auction process. They also argued that people in rural areas will not be able to participate in these auctions due to low literacy level.

Business Standard reports that more than 50% of NPA properties being e-auctioned are from tier-II cities like Jabalpur, Chandrapur, Aurangabad, Bhilwara, Hubli, Dharwad, Erode, Dharmapuri, Bhavnagar, Valsad, Gandhidham, Ujjain, Kannur, Kolhapur and Satara, amongst others.

Banks have been using e-auctions for the past couple of years and the court said that, “the process of e-auction sale, followed by the respondent banks, is only a very small step taken towards adopting modern technologies in implementing the procedures provided by law.”

How does e-auctions work

A bank can put up NPAs for e-auction after a borrower defaults on three consecutive installments. The bank then sends a notice to the borrower and gives 60 days for the borrower to reply. If the borrower is not able to convince the bank to give him more time, it goes ahead with the e-auction.

Once the auction has been put up on one of the e-auction websites such as NPASource.com, people can create an account and put in an earnest amount, which acts like a token deposit to participate in the auction. That said, some banks insist on digital signatures to establish authenticity, especially with high-value properties. Once the bidding window opens, you can enter your bid amount, that has to be more than the reserve price. You can increase the bid later on, when other participants in the auction bid higher. Unsuccessful bidders will be refunded the earnest money deposit within a few days, with no interest.

Why e-auctions are needed

Cost and time effective: Till now public got to know about these auctions through tender ad put up in newspapers which vast majority of people tend to skip. By having e-auctions it increases the chances of it being viewed by more Indians and removes the hassle of being physically present at the time of auction. With property prices going through the roof, such NPAs are something that might interest people who buy property as an investment. In some cases, the prices available via e-auctions are 20-30% cheaper than the market price.

As of now, there are several companies in this field now such as NPASource.com, e-auctions.in, and bankauctions.in among others.

More transparency:  In the lawsuit, companies claim that e-auctions are less transparent than the existing system, but what it doesn’t say is this system also reduces chances of prices being fixed by vested interests who might buy off competitors. Since bidders don’t meet each other, e-auctions reduces chances of these events being fixed, which is an advantage for the banks.

For online real estate websites: E-auction space we feel is one industry that is yet to be tapped. Though there are a few e-auction sites already, it is a sector that companies in the real estate sector should look at, especially since all these websites have pretty much the same properties listed. NPAsource.com claims that it alone has total NPA properties worth Rs 27,500 crore registered on its portal across 27,626 units. It also claims that gross NPAs of 40 listed banks has shot up by 35.20% or Rs 63,386 crore for the nine months ending December 2013 to cross the Rs 2.4 lakh crore mark.