One of the reasons why loan investment is not growing in the bank: The weak mentality of the mortgage appraiser (valuers)

The process of taking loans has become easier, and if there is sufficient money available, the interest rates are relatively low. However, there is not much demand for loans. Even those who wish to take loans often find themselves unable to do so due to various reasons, which have been discussed in various forums. One aspect that has received little attention is the weak mentality of mortgage appraisers, and this article aims to focus on that issue.

In Nepal, the practice of mortgage valuation has been ongoing since the inception of banks. Recently, the trend of having mortgage evaluations conducted by third parties began with the introduction of engineering services. When carrying out the mortgage evaluation, the appraiser relies on the documents provided by the organization and the prescribed criteria to assess the mortgage's status. However, the level of skill, experience, and knowledge among evaluators has noticeably declined.

How to conduct evaluations, what methods to use, the duties and rights of appraisers, and the duration for which evaluations are valid are topics governed by laws and standards established internationally. In our neighboring country India, similar laws have been in place for eight years. In contrast, our country lacks specific laws for valuation, which leads banks, financial institutions, and national banks to operate under existing directives.

The aim of the Nepal Valuation Association, established in 2068 BS, is to dignify the valuation profession by promoting the rights and capabilities of valuers and improving various aspects of the field. However, the absence of clear laws and the neglect by financial institutions and the national bank have hindered proper implementation.

The following directives from the Nepal Rastra Bank outline the regulations regarding valuation:

Unified Directive Issued by Nepal Rastra Bank to 'A', 'B', and 'C' Category Licensed Institutions, 2080

E.P. Direction No. 12/080 Loan Information and Blacklisting Provisions

7. Special Provisions Relating to Mortgage Appraisers

(1) Licensed banks and financial institutions must clearly outline the duties, rights, and responsibilities of appraisers when enlisting them for collateral evaluations and enter into an agreement.

(2) Licensed institutions must ensure that appraisers independently evaluate the collateral based on international standards and practices, free from conflicts of interest or bias.

(3) If a licensed institution determines that the value assessed by the mortgage appraiser during the auction is less than two-thirds of the estimated value, or if a property is incorrectly evaluated, the appraiser may be blacklisted on the recommendation of the institution.

(4) If an institution raises less than two-thirds of the assessed value at auction, the board of directors may choose not to blacklist the appraiser if it is determined that their actions were not at fault.

(5) If the borrower is removed from the blacklist, the appraiser who evaluated the collateral must also be removed from the blacklist by the relevant bank or financial institution.

(6) Licensed institutions must maintain a list of appraisers who are not blacklisted.

Referring to Article No. 3 of this Directive, evaluators have been subjected to clarification and blacklisting. When asked for clarification, banks have raised the following issues:

A. Why was the assessment five years ago higher than it is now?

B. How did the current assessment differ from the previous evaluations based on the provided documents?

C. Why did re-evaluation and auction assessments result in values less than two-thirds of the original?

D. Why is the location of the land now different from earlier evaluations?

E. Why was land assessed that did not meet the criteria in the first assessment?

These issues arise even when evaluators act in good faith. The practice of issuing letters of explanation that encompass both those who err and those who do not is troubling. This leads to evaluators underreporting values due to the fear of blacklisting, resulting in insufficient collateral for loans. For instance, if someone purchases 4 annas of land at a rate of 20 lakhs, their total cost—including fees—would be about 8.5 million. If this land is then evaluated for collateral, the appraised value may be only 1.6 million due to fears of recession and blacklisting. This example illustrates that only about 30% of the invested assets may be recoverable as loans, complicating the borrowing process.

Before issuing letters for clarification and blacklisting, it is important to consider:

A. The misconception that property values always increase arithmetically or geometrically.

B. A poor understanding of costs, prices, and valuations.

C. The fact that evaluations are influenced by various factors at the time and can differ accordingly.

D. Evaluations depend on the knowledge, skills, experience, and abilities of the appraiser.

E. Even a correct valuation may appear wrong if the borrower defaults on repayment.

F. Changes in property conditions during re-evaluation and insufficient information provided by those showing the property can negatively impact valuation.

G. A lack of criteria for determining which valuation is accurate can lead to the belief that older assessments are always wrong.

H. When dissatisfaction arises with one appraiser's valuation, it is important to consult others, but appraisals should not be overlooked during problems.

I. Appraisers should assess properties under both normal and distressed conditions.

J. Providing incorrect documents to engineers can lead to erroneous evaluations based on those documents.

K. Government land and road details not being clear in official documents can lead to misleading representations.

L. Initial and re-evaluations should consider varying criteria for roads, canals, and other features.

M. Banks often try to accept collateral at lower values when the property is not auctioned.

N. As banks prepare and evaluate documents related to collateral, it becomes challenging to take action against properties that do not meet criteria.

Currently, about 2,000 firms are engaged in the valuation profession, with 900 members of the Nepal Valuation Association. In this climate, the number of requests for clarifications from banks may be around 500 (though the actual number might be understated). The widespread issuance of clarification letters has instilled panic among evaluators. This fear can lead to undervaluation without appropriate assessments.

To adequately increase loan amounts, banks must investigate and penalize only the wrongdoers while uplifting the morale of appraisers by alleviating the existing climate of fear. It is essential for all stakeholders to recognize that it is time to implement appropriate standards and legal frameworks in the valuation profession.