(Yicai) Nov. 10 -- To expedite the recovery of funds from non-performing loans, a growing number of Chinese banks are selling seized real estate collateral directly, bypassing the slow-moving judicial auction process traditionally used for asset disposal.

Agricultural Bank of China, Bank of Communications, China Construction Bank, and many other lenders have put real estate collateral up for sale, with some having listed more than 1,000 individual properties, Yicai calculated based on incomplete statistics.

When a borrower cannot repay a loan and a judicial auction fails to resolve the matter, the bank may choose to accept the property in settlement of the debt. After completing the transfer of ownership, it then sells the property on the open market.

Unlike properties sold at judicial auction, which may carry potential legal or dispute risks, those sold directly by banks can be more attractive to buyers because they have clear property rights, according to industry insiders.

Alibaba Group Holding’s auction site has a ‘Bank Clearance’ section, with thousands of listings. For example, Qiqihar Rural Commercial Bank alone has posted 108 residential, commercial, office, and other properties for sale at prices ranging from CNY100,000 to CNY8 million (USD14,050 to USD1.1 million).

The practice is particularly favoured by rural commercial banks. For instance, on JD.Com’s auction platform, Bank of Lanzhou has listed 1,779 houses for sale, Bank of Jilin more than 2,000, and Bank of Tianjin nearly 1,300.

Sichuan Rural Credit System has sold over 25,000 homes, and the Liaoning Rural Credit System has sold 11,000 through various auction sites, including those of Alibaba and JD.Com.

Most of the properties now being sold by banks on auction sites stem from their disposal of non-performing loans, a branch manager at a joint-stock bank told Yicai. These properties were originally pledged as collateral by businesses or individuals when applying for loans.

Once a borrower is unable to repay a loan, the collateral comes into play. But as many are unlikely to be sold through the ponderous judicial auction market, banks agree to take charge of the properties to sell them directly, the manager pointed out. “This disposal model is not new, but the scale has increased recently,” he said.

But the resale prices of pre-owned properties sold by banks are much lower than those for similar properties disposed of at judicial auction. For example, a house auctioned by Lanzhou Rural Commercial Bank at the end of September sold for CNY1.5 million, while comparable units in the same development were listed at CNY1.8 million to CNY2.2 million.

The conventional path for disposing of collateral assets from defaulted loans usually takes more than two years, and may take even longer in the current market, whereas selling the property directly can accelerate the recovery of funds, a branch manager at a rural commercial bank said. Selling properties directly can speed up the funds recovery process, they added.

Banks have to sell real estate assets at a price lower than the average in the surrounding area because they are in a hurry to dispose of bad loans within a prescribed period, the manager at the joint-stock bank said, adding that lenders will even drop the initial price if they fail to find a buyer.

Editors: Tang Shihua, Futura Costaglione