30th August, 2011, National Housing Bank, New Delhi

Handbook on

Policy, Standards and Procedures for Real Estate Valuation by Banks and HFIs

Prof.Dr.P.S.N.Rao, SPA, New Delhi

Part A Background Part B Process Part C Outcome : The Handbook Part D Way Forward : Next Steps

Part A Background

Significance of Valuation Today Evolving real estate markets Sophistication of housing

finance/ real property finance options / products

Foreign Direct Investment REMFs / REITS Bad loans recovery Credibility and transparency in

global markets

Issues

Credibility Stability Bubble syndrome Accuracy Authenticity Reliable Data based Standardised Global acceptability

Education in the subject of Valuation There are no set standard educational

syllabus/courses for valuation education in India

A few universities conduct 2 years Master’s degree courses on Valuation

In many engineering/architecture/town planning institutes, valuation is taught as a subject

The Institution of Surveyors conducts an AICTE approved course on Valuation

There is no standardised continuing education either

Practice of Valuation Institution of Valuers offers membership to architects,

civil engineers for becoming APPROVED VALUERS and practice valuation as a profession

Institution of Surveyors offers membership ( based on passing an examination ) for becoming VALUERS and practice valuation as a profession

Income Tax Department, GoI registers valuers who are called REGISTERED VALUERS.

Banks EMPANEL valuers based on their own criteria

Valuation is practised in various government departments viz. departments dealing with land acquisition, urban local bodies, etc.

In some states, town planning department also performs the function of valuation ( Maharashtra )

In some states, there are separate valuation directorates

Valuer Associations

Institution of Valuers Institution of Surveyors ( Valuation Br.) Institution of Government Approved

Valuers Practicing Valuers Association of India The Indian Institution of Valuers Centre for Valuation Research, Studies

and Training

Standards of Practice

Valuation reports in India come in all shapes and sizes – no standardisation

For wealth tax purposes, Form O-1 is used.

Standards are absent The situation is almost a ‘lezeiz

faire’

International Benchmarks

TIAVSC ( The International Assets Valuation Standards Committee ) was established in the year 1981

USPAP ( Uniform Standards of Professional Appraisal Practice ), USA

AVSB ( Australian Valuation Standards Board )

Indian Initiatives

The Ministry of Companies Affairs, Govt. of India has released a concept paper for Council of Valuation Professionals of India Bill

Part B Process

Meeting at NHB in Feb 2008

This was a brainstorming session Key stakeholders were invited to raise

issues Based on this initial meeting, the way

forward was developed

Formation of IBA Steering Group -

The IBA already has a Sub-Committee on Mortgage and Valuation of Property

The issues were discussed in this Sub-Committee and subsequently, a Steering Group on Developing Valuation Standards for Real Estate Financing in India was constituted.

The IBA Steering Group had 17 members who closely interacted to bring out the Handbook.

Survey of Banks and HFIs

It was agreed that the first step would be to conduct a Survey of Banks and HFIs

The objective of this Survey was to review the existing processes being followed by Banks and HFIs for empanelling and conducting valuation of properties

Detailed questionnaires were circulated to several Banks and HFIs and information was gathered.

Existing forms and sample valuation reports were also procured.

Survey of Valuer Associations There are 5 valuer associations in India Information from all the associations

about various aspects of the profession were gathered in a structured manner.

Preparation of Draft Handbook The IBA Steering Group met had

several meetings to discuss various issues and the draft Handbook was developed.

Stakeholder discussions

The draft Handbook was discussed not only with Banks and HFIs but also the valuers from various Associations since they are the key stakeholders.

The points of view of the stakeholders were discussed.

Exposure on website

In order to have wider circulation and exposure to the Handbook, the same was put on the IBA website for about a month.

Subsequently, the date was extended for some more time so as to give adequate opportunity for all to access the draft Handbook.

Suggestions

Around 40 suggestions were received as a result of this.

These suggestions were again discussed by the IBA Steering Group and the decisions were finalised.

The final Hanbook was prepared.

Permission from IVSC Since one of the earlier Committees of the

Government of India had recommended that the Valuation Standards for India need to be in tune with international standards, the standards in the Handbook were accordingly prepared.

The same were discussed with the International Valuation Standards Committee ( IVSC ) and due permission was obtained since international standards were being adapted to suit Indian conditions. Due acknowledgement has also been accorded to IVSC for the same.

Release of Handbook

The Handbook has been printed and is ready for distribution.

Part C Outcome : The Handbook

Coverage

Policy Standards Procedures Annexures

Policy Criteria for Empanelment of Valuers Duration of Empanelment Removal Re Empanelment Professional Fees Compliance to Standards and Procedures Independence and Objectivity Obligations of Banks and HFIs Date of effect

Standards

Standard 1 – Market Value Basis of Valuation

Standard 2 – Bases other than Market Value

Standard 3 – Valuation Reporting Code of Conduct Application of Standards to Secured

Bank Lending

Procedures Procedure for Call for Applications for

Empanelment Procedure for Selection of Valuers Procedure for Annual Performance

Review Procedure for Conflict Resolution Procedure for Internal Work Allocation in

Banks / HFIs Procedure for Aloting work to Valuers

Annexures Format of Valuation Report ( more than Rs.

5 crores ) Format of Valuation Report ( upto Rs. 5

crores ) Format of Terms of Engagement for

Empanelment of Valuers Format of Undertaking to be submitted by

the Valuer for Empanelment Application for Empanelment of Valuer with

Banks/HFIs

Part D Way Forward : Next Steps Adoption of Handbook by the Boards of Banks and HFIs

Distribution of Handbook to all Valuer Associations

Placing of Handbook on IBA website

Placing of Handbook on websites of Banks and HFIs

Developing Internal Systems for Implementation of Handbook

Training of Key Banking / HFI Officials on new regime based on the Handbook

Training of Valuers in 6 months ‘prescribed valuation course’ so as to achieve the target by year 2015

Certificate in Valuation of Real EstateSuggested 6 months Education Programme

INTRODUCTION – Evolution of Valuation Practice, Purposes of Undertaking Valuation, Organisations Undertaking Valuation, Private practice of Valuation as a Profession

THEORY OF VALUATION – Theories of Valuation, Economic Principles, Factors Affecting Value, Concept of Depreciation, Types of Value.

LEGISLATION – Overview of various laws including Constitutional provisions on property and right to ownership of property, Transfer of Property Act, Land Acquisition Act, Rent Control Act, Apartment Act, Indian Registration Act, Stamp Duty Act, Municipal Acts, Town Planning Acts, Indian Easement Act, Laws of Succession and Wills, Indian Contract Act, Indian Arbitration Act, Valuers’ Bill. Important Court cases and Judgements on Valuation.

STANDARDS – Necessity for Standards, International Valuation Standards Committee, Valuation Standards in India, IBA Handbook

PROCESS OF VALUATION- Approaches and Methods of Valuation, Concept of Dilapidation, Valuation of Different Asset Classes of Properties, Case Studies of Valuation, Practical Exercises and Report Writing.

PROFESSIONAL PRACTICE- Role of Valuer , Code of Ethics and Practice, Responsibility to Clients and Society, Professional Associations in India and abroad, Global Practices, Governmental Interface in Regulating the Profession.

Issues

Methodology of course delivaryPreparation of course contentNodal agency to coordinate all activitiesInvolving all Valuer associationsOnline delivary of course materialContact programmesTesting and certification

FundingFunding agenciesCourse FeesOther expenses

Thank you.

Prof.Dr.P.S.N.RaoeMAIL : drpsnrao@hotmail.com