By Shreya Routh, (email@example.com)
Housing Finance Company (HFC) is a type of non-banking financial institution which is primarily engaged in the business of providing home loans and other related products. Unlike other Non-Banking Financial Companies which are governed under the regulatory framework of RBI, HFCs are regulated by the National Housing Banks (NHB). Collateral securities are accepted against loans advanced by HFCs which include the property for which loan has been granted and some other collaterals as well. Since properties serve as the underlying asset on which financing is given, the amount of loan advanced depends upon the value of the collateral offered. The value of the collateral ensures that the lender is secured and has covered itself from the risk of default. Hence, correct and realistic valuation of properties or fixed assets becomes necessary at the time of advancement of loan. Further, loans given by HFCs are usually for a long period of time. Though the value of property is less volatile but there are chances that the same may fluctuate during the loan tenure. Usually after a loan has been granted, HFCs do regular property valuation to understand how the property value is changing. There is a need for revaluation at regular intervals so that the lender is assured of little or no deviation in the Loan to Value (LTV) ratio and also that the property is valued at its current fair market value.
Presently, valuation is undertaken independently by the HFCs and there is no uniform policy for valuation of properties and appointment of registered valuers for the purpose. No prescribed qualification for empanelment of registered valuers is in existence. Against such backdrop, NHB has introduced guidelines vide its circular no. NHB (ND)/DRS/Policy Circular No.81/2017-18, dated August 31, 2017 with respect to the standard policy to be followed for valuation of properties and collaterals and qualifications for empanelment of registered valuers. The provisions of the aforesaid circular shall be applicable to every Housing Finance Company registered under Section 29A of the National Housing Bank Act, 1987.
Guidelines for formulation of policy on valuation of immovable property and empanelment of valuer:
In accordance with the NHB circular, HFCs must have a Board approved policy for valuation of the property and collaterals accepted against loans. The policy shall inter alia be formulated on the following guidelines:
1. The registered valuer must be independent and not have any direct or indirect interest. The HFCs must obtain an Independent Valuation Report from such valuer. Further, where the value of the property is Rs. 1 Crore or more, the HFC must obtain valuation reports from two registered valuers.
2. The Board must decide the frequency of valuation of properties and securities based upon the past volatility in prices and such frequency shall be reviewed once in a year. However, it has been specifically provided by NHB that valuation of Non- Performing Assets should be done annually.
3. Any change in the method of depreciation should reflect the change in the expected pattern of consumption of the future economic benefits of the assets.
4. In situations where the value of the property is substantially impaired by an event, for example, due to earthquake or any other natural calamity, immediate revaluation must be facilitated.
Guidelines for formulation of policy on revaluation of HFCs own property:
Additionally, HFCs shall also have a Board approved comprehensive policy in place for valuation of its own properties and such a policy shall inter-alia cover procedure for identification of assets for revaluation, maintenance of separate set of records for such assets, the frequency of revaluation, depreciation policy for such assets, policy for sale of such revalued assets etc.
A policy for revaluation of the own assets of the HFC must be prepared. The revaluation policy shall be based on the following instructions from NHB:
1. HFCs shall include revaluation reserves at a discount of 55% in its Tier II capital. It is necessary that the revaluation reserves represent true appreciation in the market value of the properties.
2. A “Notes on Accounts” should be prepared covering the disclosures required to be made regarding the details of revaluation such as the original cost of the fixed assets subject to revaluation and accounting treatment for appreciation/ depreciation etc.
Guidelines on empanelment of registered valuers:
With regard to the appointment of registered valuers it has been provided that proper procedure must be followed for empanelment of registered valuers and a register stating the approved list of valuers should also be maintained. For the purpose of determining the qualifications of the registered valuer, Section 34 AB (Rule 8A) of the Wealth Tax Act, 1957 (‘Wealth Tax Act’) must be followed. Though the Wealth Tax Act has been abolished but by virtue of section 8 of the General Clauses Act, where there is a reference in a statute to a repealed statute, the reference will automatically refer to the provisions of the re-enacted statute. However, in the absence of any revised regulation, it will be logical to construe the meaning from the extant regulations itself.
The qualifications prescribed under the Wealth Tax Act for appointment of a registered valuer are as follows:
1. A valuer of Immovable property (other than agriculture lands, plantations, forests, mines and quarries) should have the following qualification:
(i) He should be a graduate in civil engineering, architecture or town planning of a recognized university or
(ii) He should be a Post graduate in valuation of real estate from a recognized university or
(iii) He should possess a qualification recognized by the Central Government for recruitment to superior services or posts under the Central Government in the field of civil engineering, architecture or town planning besides holding other qualification and experience as detailed in the enclosed Annexure-”A”.
2. A valuer of Agriculture lands (other than plantations) should have the following qualification:
(i) He must be a graduate in agricultural science of a recognized university and must have worked as a farm value for a period of not less than five years and
(ii) He must be a person formerly employed in a post under Government as a Collector, Deputy Collector, settlement officer, Land Valuation Officer, Superintendent of Land Records, Agriculture Officer, Registrar under the Registration Act 1908 (16 of 1908), or any other officer of equivalent rank performing similar functions and must have retired or resigned from such employment after having rendered service in any one or more of the posts aforesaid for an aggregate period of not less than five years.
3. A valuer of coffee plantation, tea plantation, rubber plantation or, as the case may be, cardamom plantation shall have the following qualification:
(i) He must have, for a period of not less than five years, owned, or acted as manager of a coffee, tea, rubber or as the case may be, cardamom plantation having an area under plantation of not less than four hectares in the case of a cardamom plantation or forty hectares in the case of any other plantation; Or
(ii) He must be a person formerly employed in a post under Government as a Collector, Deputy Collector, Settlement Officer, Land Valuation Officer, Superintendent of Land Records, Agricultural Officer, Registered under the Registration Act, 1908 (16 of 1908), or any other officer of equivalent rank performing similar functions and must have retired or resigned from such employment after having rendered service in any one or more of the post aforesaid for an aggregate period of not less than five years, out of which not less than three years must have been in areas, wherein coffee, tea, rubber or as the case may be, cardamom is extensively grown.
4. A valuer of mines and quarries shall have the following qualification:
(i) He must be a graduate in mining of a recognized university, or must possess a qualification recognized by the Central Government for recruitment to superior services or posts under the Central Government in the field of mining besides holding other qualification and experience as detailed in the enclosed Annexure- “A”.
5. A Valuer of Machinery and Plant shall have the following qualification:
(i) He should be a graduate in mechanical or electrical engineering of a recognized university or
(ii) He should be a Post graduate in valuation of machinery and plant from a recognized university or
(iii) He should possess a qualification recognized by the Central Government for recruitment to superior services or posts under the Central Government in the field of mechanical or electrical engineering besides holding other qualification and experience as detailed in the enclosed Annexure-“A”.
(i) Minimum experience of valuers: The valuer must have been in practice as consulting engineer, (valuer of real estate) surveyor or architect for a period not less than 5 years.
(ii) Authorities with whom the valuers name is to be registered for eligibility are as follows:
Valuer should be a member of professional body i.e. Institution of Valuer besides registration with one of the following authorities:
a. Valuer registered with Chief Commissioner of Income Tax.
b. Valuer registered with Government/Local authorities
The intention of the NHB has been to streamline the business of property valuation. The circular states that the prescribed policy for valuation and empanelment of registered valuers should be in place by 31.12.2017 and be made effective from January 01, 2018. Though the guidelines are in the form of recommendation, but it is advisable that HFCs follow and implement the same.