We read news on daily basis of NPA / Non Performing Assets, insolvency, etc. Have you wondered as to how come we are reading so many news about NPA, Insolvency, Bank scams so frequently? The reason for this lies in systematic degradation of the complete system. The system involves various acts passed (or not passed) by parliament / state assemblies, rules framed by the bureaucracy to support these acts / laws, guidelines created by organizations like Indian Banks’ Association for member banks, officials who work in those banks, creditors, valuers of properties, etc. Let us see one by one reason for this degradation
Mr. Arun Jaitley in his first full budget dated 28-Feb-2015 abolished the Wealth Tax and replaced it with an additional surcharge of 2 per cent on the super rich with a taxable income of over 1 crore annually from 1st April 2016.
Even though the wealth tax was abolished as above budget act, the complete Wealth Tax act has not been abolished, so the structure for calculation of wealth tax on properties, powers of various authorities, etc. are still in effect. One of the provisions in this act is registration of valuers (section 34AB) and it was kept intact even after repealing of the wealth tax. Now you would be wondering what is the relationship of wealth tax act and NPAs? Because in India the banks are empaneling valuers who are registered valuers under the above section 34AB of Wealth Tax act.
To take care of NPA to certain extent Indian Parliament passed Insolvency and Bankruptcy Code 2016 (IBC) and defined criteria for registration of values over there as well. Insolvency and Bankruptcy Board Of India (IBBI) was created under this act to oversee the registration of Insolvency Professionals (IP) and Registered Values (RV). For this purpose, the IBBI conducts rigorous examinations having very high passing score (60%) and registers IPs and RVs.
Income Tax department has come up with Rules for registration of valuers under the above-mentioned Wealth Tax Act (Rule 8A). In these rules following qualification was inserted at later date as (the valuer should) “be a post-graduate in valuation of real estate from a recognised university;”. But there is no university in India which offers a graduate level valuation course which are approved either by University Grants Commission (UGC) or All India Council for Technical Education (AICTE). So if there are no graduate level courses in valuation, how come income tax department mentions above criteria of “post graduation in valuation” as a criteria.
As of now three universities in India offer post-graduate level courses in valuation but, these courses are not approved by either UGC or AICTE. So how an important department of government of India can ignores the fact that they are making some qualifications as pre-requisites which are not approved by other government institutions such as UGC or AICTE. Moreover in the high-court of Punjab and Haryana there is a case pending against the universities offering these courses as well as UGC for approving such course. The reason being:
When an engineer studies for 4 years after 12th standard, s/he studies various subject related to engineering from basic fundamentals and knowledge of many of these subjects is used while carrying out the valuation by these engineers, architects or town planners. The above mentioned post graduate valuation courses have same subjects and syllabus for engineers as well as non-engineers. So the non-engineers who want to take admission have never been taught about the basic engineering subjects. How can commerce, arts or law graduates would get that knowledge and understand the theoretical aspect of say building structures before carrying out their valuations? This also means that the income tax department is undermining the education taught to the engineers, architects or town planners during their college and are equated with other graduates for valuation of real estates or plant and machinery.
Now many valuers have been registered with Income Tax department with this loop hole in qualification namely “post graduate course in valuation”. The Income Tax department should take steps not only to remove this provision but also to nullify registration of all the valuers who have been qualified as registered values only because they had completed “post graduate course in valuation”. Because all these graduate level people without any engineering knowledge are carrying out valuations which are dictated by the concerned persons and most of the times these are over valuation of properties.
For the above “post Graduate in Valuation” qualification, the criteria has been further diluted as under:
[Provided that in the case of a person possessing a post-graduate degree in valuation of real estate from a recognised university, the provisions of this sub-rule shall have effect as if,—
(a) for the words “ten years”, the words “two years” had been substituted;
(b) for the words “fifty thousand rupees in any three of five preceding years”, the words “fifty thousand rupees in any one of the two preceding years” had been substituted.]
So it means that for an engineering graduate experience of ten years is required but if some arts / commerce graduate does the post-graduation in valuation, then only two years of experience is sufficient. Is it justifiable? The causes and results of this amendment are obvious.
Same is applicable for the income. In case of engineering graduates, the minimum income required is Rs. 50,000 in 3 years out of the block of 5 years. But for “post graduates in valuation” the income criteria is also diluted to Rs. 50,000.00 in one years in any of the preceding two years. Again dilution of criteria to bring in sub-standard valuers into the system
In the same Rule 8A, income tax department should modify the eligibility following eligibility criteria “in a post under any other employer carrying a remuneration of not less than Rs. [2,000] per month,” (sub section (2) (ii) (b)). Now a days, even as per the government minimum wages act, the minimum wages should be approx. Rs. 200 to Rs. 400 per day for unqualified workers and considering 25 working days a month, the monthy renumeration comes out to be Rs. 5,000 to Rs. 10,000 per month for unqualified worker (class 3 and class 4 employees). Does the above criteria means that the valuers are eligible to get lesser amount than the unqualified workers class 3 and class 4 workers?
With the above, we know why the rules were changed and for whose benefit were they changed and their long term impact on the valuation process and NPAs.
As per Wealth Tax Act, the Income tax department has defined a fee structure in Rule 8C. So for valuation of a flat worth Rs. 1 Cr. the valuation fees as per this structure should be Rs. 10,500 + GST. We would discuss this point further in the banks section.
IBA has specified that the registered values with income tax should be qualified to be empanelled as a valuer with following more terms and conditions
By giving additional marks to the members of a society the banks are indirectly promoting that particular association or that society. If a valuer has been registered by say Income Tax under Wealth Tax act or by IBBI under IBC, why the membership of a private association is given preferential treatment?
The IBA guidelines should be changed and make as practical as possible.
The banks have come up with their own set of rules and criteria for empanelment of values as well as payment to the values as follows:
Since the banks offer such a less fees to the valuers, they cannot survive with valuation of only one flat per day. So few of them carry out may be carrying out 5, 10, 50 or even 100 flats in one day. Now you would wonder as to how these valuers carry visit so many places in one day of 24 hours, carry out market research of properties in that area, perform so many valuations in one day and then finally print the report and sign on them. The answer is all these valuers employ people who are not engineers (not even diploma holders). These people visit the sites, take the photos. Pass on these photos using applications like WhatsApp to the valuers’ office. Wherein other set of report writers are sitting and they write the report based on the photos and prepare the valuation report and the valuer finally signs (sometimes people stamp valuers’ signature on the report) the report and it is submitted to the banks. I have mentioned about flats, but same is applicable for the factories as well. This is akin to a ward-boy carrying out the surgery on a patient in the presence / absence of the qualified surgeon and without the surgeon taking part in the surgery. Will this be acceptable? This is again a clear cut indication that the rules are getting bent and valuations are performed in high quantities and whom do you think would get benefitted due to this?
In case of flats, the home buyers do not want the flat to be confiscated for want of non-payment, so these flat owners who are generally law abiding middle class citizen religiously make the payment. But in case of factories that is not the case. So many a time when the factories are overvalued by the above valuers (in connivance with the bank officials). In such cases the factory owners don’t pay and the loan becomes NPA. In order to avoid this scenario, the banks should:
Here I would like to draw the attention of the readers to a case of famous Reid & Taylor suiting brand. This brand has taken a loan of about Rs. 4,000 Cr from various financial institutions and at the end it was realised that they had assets worth only Rs. 200 Cr. to Rs. 250 Cr. So Rs. 3,750 Cr assets were overvalued and the loan was given to this company on these overvalued assets by the banks. Now this company loan has become NPA and by no means the financial institutions would get back their Rs. 3,750 Cr. back and this is ultimately the Indian taxpayers and Indian middle class investors’ money which is kept in banks as an FD.
Due to the above NPAs the cost of funding for banks is increasing and hitting to the middle class in terms of higher interest rates.
So I would like to appeal to all the concerned to remove the anomalies in the system and reduce the future NPAs.
Author is a Chartered Engineer or CEng in Mechanical Engineering Field and also a registered valuer with IBBI as well as Government Approved Valuer with Income Tax Department under Wealth Tax Act. Section 34AB
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