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

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 ABackground • Part BProcess • Part COutcome : The Handbook • Part DWay 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 BProcess

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 COutcome : 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 DWay 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 delivary • Preparation of course content • Nodal agency to coordinate all activities • Involving all Valuer associations • Online delivary of course material • Contact programmes • Testing and certification • Funding • Funding agencies • Course Fees • Other expenses

Thank you. • Prof.Dr.P.S.N.Rao eMAIL : drpsnrao@hotmail.com

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