Selling non-performing loans via auction

A Non-performing loan (NPL) is a type of loan where the borrower stopped making payments on the original amount and interest. Usually, the loan becomes non-performing when the payment is 90 days overdue, although the timespan depends on a contract. In order to improve liquidity, manage market perception, uphold rankings, reduce the time taken for the financial recovery, and to free up management resources banks often sell NPLs to their investors. There are 2 types of non-performing loans:

• A loan where the interest is not paid within 90 days
• A loan which is less than 90 days late, however, the lender presumes that payments will no longer be made

Auction is one of the main ways of selling non-performing loans of both types. It is considered to be one of the leading options for NPL sale because auction ensures transparency, efficiency, and strict implementation of rules. These features help to resolve non-performing loans in a fast and simple way. Moreover, auctions encourage competition which brings high income for the seller.

Nowadays one can participate in an NPL sale auction online, which saves time and money and ensures data security. With the right software, auctions are proven to be a highly relevant option for the resolution of loans. Let’s take a look at the example from the Kyiv School of Economics (KSE) study about selling non-performing loans in Ukraine.

NPL and ProZorro.Sale

The KSE study analyzed the performance of online auctions for selling non-performing loans during the period from 2016 to 2018 using the hybrid multi-platform ProZorro.Sale built by Quintagroup developers. The assessed data shows that approximately 22% of the overall loan face value was recovered by the auctions. The 30% of the normal contract value to face value ratio was generated from that. According to this data, Ukraine accomplished more than Mexico (2007-2011), Nigeria (2011-2015), Thailand (1999-2003), Brazil (2007-2011), and others. During the period of time from October 31, 2016, till July 25, 2018, non-performing loans were sold via ProZorro.Sale online auction platform for 194.7 mln Euro.

Hybrid Dutch auction for NPL sale

For NPL sale Ukraine used two types of online auctions: Reverse auction from ProZorro and Hybrid Dutch auction.

Why is Hybrid Dutch auction more suitable for NPL sale than Reverse auction? The auction allows taking into account the interests of all interested parties in the sale of the lot. This auction has got quite an interesting feature - it consists of 3 parts: Dutch Part, Sealed Bid Part, and Best Bid Part. This auction is sometimes called an Insider as it takes into account the interests of those bidders who have insider information about the true value of the lot. An Insider can stop the auction during the Dutch Part knowing the value of the lot, and if he first pulls a button in the first stage, he can win the whole auction, having a priority to offer a higher price in the third stage of the auction.

Hybrid Dutch auction is proven to be more efficient in selling non-performing loans. Here’s why:

Sale price

By looking at the table above we can see that the Hybrid Dutch auction has a lower average price but the total recovery is higher than in the Reverse auction. That results from the fact that Dutch auction has got a higher success rate: 9.5% of Hybrid Dutch auctions were completed while only 2.3% of Reverse auctions were completed.

Sale speed

As for the NPL sale speed, it takes approximately 3 months to sell the lot via Reverse auction and 2 months via Dutch auction. The table below shows the time to sell the lot via Reverse auction and Hybrid Dutch auction.

Read more about the advantages and rules of the Hybrid Dutch auction in the article.

Auctions for NPL sale and you

A similar strategy can be used in other economies with analogous institutional issues as well which allows you as an auction holder to conduct online auctions using our auction software all around the world instead of using offline auctions that are too dependent on time and place. We created auction software on the basis of the OpenProcurement platform for putting non-performing loans for sale. Our auction software is known for complete process transparency, time-saving procedures, complete customization, and reliable customer support. Contact us to try our software yourself!