RBI warns banks on real estate valuation frauds

Alarmed by inflated valuations of real estate properties for the purpose of loans, the Reserve Bank of India (RBI) has asked all banks to submit an action-taken report on the issue.

The matter was raised last week by RBI Governor D Subbarao during a meeting of the Board for Financial Supervision (BFS). After this, top RBI officials met representatives of the banking industry earlier this week. The regulator reminded bankers about the prudential norms on valuation of assets and asked them to follow these in both letter and spirit.

Sources close to the development said the sharp spurt in such cases pointed to a nexus between independent valuers appointed by banks and a section of real estate developers. “RBI has come across a high incidence of such frauds in recent times while reviewing the annual financial inspection reports of banks. As a result, the matter was taken up by BFS and the governor wanted the issue to be addressed on a priority basis,” said a banking industry official.

BFS was formed in 1994 in the wake of the Harshad Mehta scam. Its objective is to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies. BFS, which meets once a month and discusses annual financial inspection reports and various issues related to the sector.

The sources said banks were “reminded” that valuation agencies indulging in such practices could be blacklisted. They were advised to share the names of the blacklisted agencies with each other.

Such frauds affect banks when they have to liquidate a property due to a loan default. During liquidation, it is often found that the value of the property is far less than what was mentioned when the loan was sanctioned. RBI has noticed frequent occurrence of such incidents.

Confirming the development, Indian Banks’ Association (IBA) CEO K Ramakrishnan said RBI discussed the issue with them. “IBA has shared RBI’s concerns with the member-banks. We have assured RBI that banks will exercise caution while evaluating assets.”

According to a note by Macquarie India, non-performing loans in the commercial real estate segment have increased from 1.6 per cent to 2.3 per cent in the past one year. The absolute level of such loans rose 70 per cent last year, particularly for state-owned banks.

In October, RBI raised the risk weightage on residential housing loans of Rs 75 lakh and above, to 125 per cent and capped the loan to value ratio at 80 per cent.

Source: Business Standard