For properties valued at Rs 1 cr or more, housing finance cos must obtain at least two independent reports
Amid a prolonged slowdown in the property market, the spotlight is now on how housing finance companies (HFCs) value properties.
Housing finance regulator National Housing Bank (NHB) has seen that HFCs do not follow a uniform policy for valuation of properties and appointment of valuers for the purpose. The issue of correct and realistic valuation of properties or fixed assets owned by HFCs assumes extreme significance, and NHB has directed housing finance firms to put in a system for what it calls a "realistic valuation" of properties. It has given HFCs time till December 2017 to have proper policies in place and ensure strict compliance from 2018.
Properties serve as the underlying asset on which financing is given. Banks were the largest housing credit lenders in India and accounted for 63% of the market as on March 31, 2015. However, their market share has declined from 70% in March 2010 as HFCs have gained share. In the 12 months ended June 30, 2017, the housing sector's credit grew 14% at Rs 14.6 lakh crore. Usually after a loan has been granted, HFCs do regular property valuation to understand how the property value is changing. If there is a depreciation, they are supposed to ask for more margin from the borrowers.
"It has been observed that different HFCs follow different policies for valuation of properties and appointment of valuers for the purpose. The issue of correct and realistic valuation of properties or fixed assets owned by HFCs and that accepted by them as security (primary or collateral) for a sizeable portion of their advances portfolio assumes significance in view of its implications for the correct measurement of capital adequacy position of HFCs. In this context, there is a need for putting in place a system/procedure for realistic valuation of properties/fixed assets and also for empanelment of valuers for the purpose," NHB told all registered HFCs.
For properties valued at Rs 1 crore or above, HFCs will have to obtain minimum two independent valuation Reports. The maximum demand for housing in India has always been where property prices range from Rs 15 lakh to Rs 50-60 lakh, while a huge number of ready-to-move projects in cities like Mumbai and NCR are priced upwards of Rs 1 crore.
Among others, NHB has directed HFCs to have a board-approved policy in place for valuation of properties including collaterals accepted for their exposures, valuation done by professionally qualified independent valuers who have no direct or indirect interest and valuation should be done at a proper frequency. "Further, where the value of the properties has been substantially impaired by any event, these are to be immediately revalued and appropriately factored into capital adequacy computation," NHB said.
Rating agency Icra expects gross non-performing assets (NPAs) of HFCs to be between 0.9% and 1.3% for FY18. Ravindra Sudhalkar, ED & CEO, Reliance Home Finance, said he welcomes NHB's move on the realistic valuation of properties. "It will go a long way in improving the quality of collateral assessment across the housing finance sector. Reliance Home Finance's own policies and process are also similar to the proposed guidelines and can be easily assimilated into the current policy framework," he said.
Anuj Puri, chairman, Anarock Property Consultants said with a slowdown in the property market, property prices today can go either way. "A few years ago, a lender giving loan for a property was almost ensured of price appreciation. Today, it can go both ways. I believe NHB is ensuring that HFCs are doing the right valuation so that they capture the true price of the property always."
While HFCs have been permitted to include revaluation reserves at a discount of 55% as a part of Tier II Capital, NHB said it is necessary that revaluation reserves represent "true appreciation in the market value" of the properties and HFCs have in place a comprehensive policy for revaluation of fixed assets owned by them. HFCs have been directed have a board-approved comprehensive policy in place for valuation of its 'own properties' and such a policy should 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.
...& ANALYSIS
- A few years ago, a lender giving loan for a property was almost ensured of price appreciation. Today, it can go both ways
- NHB has directed housing finance firms to put in a system for what it calls a "realistic valuation" of properties
- It has given HFCs time till December 2017 to have proper policies in place and ensure strict compliance from 2018
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