NEW DELHI (CEV TECHNO NEWS): Reserve Bank Of India, Department Of Regulation, Central Office, 2nd Floor, Main Office Building, Shahid Bhagat Singh Marg, Fort, Mumbai has released the circular relating to Master Direction – Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021 on 17/02/2021

The Reserve Bank of India (the Bank), having considered it necessary in the public interest, and being satisfied that, for the purpose of enabling the Bank to regulate the financial system to the advantage of the country and to prevent the affairs of any Housing Finance Company (HFCs) from being conducted in a manner detrimental to the interest of investors and depositors or in any manner prejudicial to the interest of such HFCs, and in exercise of the powers conferred under sections 45L and 45MA of the Reserve Bank of India Act, 1934 and Sections 30, 30A, 32 and 33 of the National Housing Bank Act, 1987, hereby issues to every HFC, in supersession of the regulations/ directions as given in Chapter XVII of these directions, the Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021 hereinafter specified. Said by Sh. Manoranjan Mishra (Chief General Manager).

Master Direction

Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021

Important key Features related to our profession are:

104. Valuation of Properties – Empanelment of Valuers HFCs are required to put in place a Board approved valuation policy for putting in place a system/ procedure for realistic valuation of properties/ fixed assets and also for empanelment of valuers in accordance with the details contained in Annex XIV.

Annex XIV

Valuation of Properties – Empanelment of Valuers

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 sizable portion of their advances’ portfolio assumes significance in view of its implications for 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. HFCs shall be guided by the following aspects while formulating a policy on valuation of properties and appointment of valuers:

1. Policy for valuation of immovable properties

1.1. HFCs shall have a Board approved policy in place for valuation of properties including collaterals accepted for their exposures.

1.2. The valuation shall be done by professionally qualified independent valuers i.e. the valuer should not have a direct or indirect interest. However, valuation of properties by the internal technical valuers of housing finance companies is permissible subject to the internal technical valuer having qualifications similar to those prescribed under the Companies (Registered Valuers and Valuation) Rules, 2017.

1.3. The frequency of valuation shall be decided by the Board of an HFC, based on the observed volatility in the prices of the assets in the past except annually in the case of Non-Performing Asset (NPA). The frequency of valuation in case of Non- Performing Asset (NPA) shall be annual in case of assets classified as sub-standard for more than six months or the classification of assets as doubtful assets.

The frequency decided by the HFC shall be reviewed by its Board annually. Further, where the value of the properties has been substantially impaired by any event, these are to be immediately revalued and appropriately factored in to capital adequacy computation.

1.4. Valuation procedure to be followed to ensure that the realisable value of properties is reasonably estimated.

1.5. HFCs shall obtain minimum two valuation reports, at least one of them being from an independent valuer, in case the loan amount is ₹50 lakh or above (or such any other lower value as may be decided by the Board of the company) and below ₹75 lakh. The lower of the two valuations shall be considered by the HFC for deciding upon the loan amount.

1.6. In case the loan amount is ₹75 lakh or above, HFCs shall necessarily obtain minimum two independent valuation reports and the lower of the two shall be considered by the HFC for deciding upon the loan amount.

1.7. The HFCs shall obtain minimum two independent valuation reports for properties valued at ₹1 crore or above.

1.8. The requirement of valuation in respect of financing of the initial purchase of a residential dwelling unit from a State Housing Board/Municipal Corporation/ Developmental Authority or other public agencies by an HFC shall be decided by the company with the approval of its Board.

1.9. In respect of financing of any initial transaction of the purchase of a property, the value of the property for the purposes of arriving at the Loan to Value ratio (LTV) should not exceed the documented transaction value as per the agreement to sale, sale deed etc. Valuation in such cases, if required, may be done as per the policy approved by the Board of the company.

2. Policy of revaluation of HFC’s own properties In addition to the above, the HFCs may keep the following aspects in view while formulating policy for revaluation of their own properties:

2.1. HFCs have been permitted to include revaluation reserves at a discount of 55% as a part of Tier II Capital. In view of this, 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 shall have a Board approved comprehensive policy in place for valuation of its own properties and such a policy should 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. The policy should also cover the disclosure required to be made in the ‘Notes on Account’ regarding the details of revaluation such as the original cost of the fixed assets subject to revaluation and accounting treatment for appreciation/ depreciation etc.

2.2. As the revaluation should reflect the change in the fair value of the fixed asset, the frequency of revaluation should be determined based on the observed volatility in the prices of the assets in the past. Further, 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. The HFCs should adhere to these principles meticulously while changing the frequency of revaluation/method of depreciation for a particular class of asset and should make proper disclosures in this regard.

3. Policy for Empanelment of Independent Valuers

3.1. HFCs should have a procedure for empanelment of professional valuers and maintain a register of ‘approved list of valuers’.

3.2. HFCs shall prescribe a minimum qualification and minimum post qualification experience for empanelment of valuers. Different qualifications and experience may be prescribed for different classes of assets (e.g. land and building, plant and machinery, agricultural land, etc.). While prescribing the qualifications, HFCs may take into consideration the qualifications prescribed under Section 34AB (Rule 8A) of the Wealth Tax Act, 1957.

3.3. While framing the above policy, HFCs shall also be guided by the provisions of the Section 247 of the Companies Act, 2013, Rules made or to be made thereunder and amendments therein, from time to time. Further, HFCs shall also be guided by relevant Accounting Standards.

Annex XV

Notification as “Financial Institution” under Section 2(1)(iv)(m) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

Annexure XV (a)

Housing Finance Company (HFC), should fulfill the following criteria before forwarding application to NHB for recommending to the Central Government for notification as Financial Institution under Section 2(1)(m)(iv) of the SARFAESI Act:

1. i) The HFC should hold the valid Certificate of Registration (“CoR”) issued under Section 29 A of the NHB Act, 1987;

2. ii) The size of HFC, in terms of Net Owned Fund (“NOF”), at the time of making the application, should be the prevailing statutory NOF required to be maintained to hold CoR, as notified by the Bank from time to time;

iii) The size of HFC, in terms of loan assets (Individual Housing Loans) outstanding should not be less than ₹50 crore;

1. iv) The HFC should have commenced the business of providing housing loans subsequent to grant of CoR and should have completed 18 months of business operations after commencement of business;

2. v) There should not be any major supervisory concerns (i.e. concerns pertaining to non-compliances of provisions of National Housing Bank Act, 1987), emerging out of offsite surveillance as well as onsite inspection, pending at the time of making the recommendation;

3. vi) HFC should have attained the minimum supervisory rating of “B-“ signifying satisfactory and having scored more than 60 marks out of 100 in the CAMELS Model in the rating scale of ten ranging from A+ to D;

vii) There should not be any adverse report received from FIU-IND, SFIO or any other regulatory authorities viz. RoC, RBI, SEBI, IRDAI etc. as available in the public domain of their website.

Annexure XV (b)

Housing Finance Company (HFC), which is notified as Financial Institution under Section 2(1)(m)(iv) of the SARFAESI Act should fulfill/ ensure compliance of the following criteria failing which NHB may recommend such HFCs to the Central Government for de-notification as Financial Institution under the said Act:

1. i) The individual housing loan portfolio should not have fallen below 50% of total loan portfolio in two consecutive financial years.

2. ii) HFC shall secure and maintain the minimum supervisory rating of “B-“ i.e minimum 60 marks out of 100 marks in two consecutive financial years.

iii) No adverse report should have been received from FIU-IND, SFIO or any regulatory authorities viz. RoC, RBI, SEBI, IRDAI etc. as available in the public domain of their website.

1. iv) No major supervisory concerns (i.e. concerns pertaining to noncompliance of provisions of National Housing Bank Act, 1987) shall have emerged out of offsite surveillance as well as onsite inspection against the HFC and it remained un- rectified for two years.

2. v) CoR should not have been either cancelled by the Bank or surrendered voluntarily by the HFC due to change in business line or for some other reasons.

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