Only approved appraisers to assess loan collateral: Cenbank 

The Bangladesh Bank has ordered commercial banks to engage third-party evaluation firms, licenced by the central bank, to assess the valuation of mortgaged assets against loans. This regulatory move is designed to instill transparency and discipline within the banking sector by ensuring fair appraisal of collateral.

However, institutions doing valuation must obtain prior approval from the central bank, according to a circular issued by the central bank's Banking Policy and Regulation Department on Tuesday (28 November).

The circular underscores the objective of mitigating risks associated with instances where mortgage prices were inflated. Such cases often lead to non-repayment of loans creating challenges for lenders in recovering funds through the sale of mortgaged properties.

Experts say the initiative will help address these issues, creating a robust risk management framework and promoting accountability in the banking industry.

Under the provisions of section 29 (a) of the Bank Companies (Amendment) Act, 2023, only licensed collateral appraisers registered with the Bangladesh Bank are authorised to assess the value of assets pledged as collateral for customer loans. 

To effectively manage credit risk, banks typically accept immovable assets like land and buildings, as well as movable assets such as machinery and easily saleable goods, as collateral from borrowers.

The circular mentioned the importance of accurate and reliable collateral assessments in the banking sector, emphasising their role in ensuring effective loan management, maintaining credit discipline, facilitating the collection of defaulted loans, facilitating foreclosure, enabling the inclusion of non-banking assets in loan collateral, facilitating loan rescheduling, and ensuring proper accounting of reserve provisions against classified loans.

Interested institutions seeking to provide collateral assessment services must formally apply for registration with the central bank. Following a rigorous evaluation process, eligible institutions will be selected and categorised into "A" and "B" groups based on their expertise and experience.

Banks can assess up to Tk1cr

According to the circular, banks can conduct their own collateral assessments for loans up to Tk1 crore. For loans exceeding Tk1 crore, the assets must undergo a dual assessment process involving both the bank's own internal appraisers and an external collateral valuation institute.

A senior central bank official, on condition of anonymity, told The Business Standard, "We have encountered numerous instances in the past where the value of assets held as collateral has been inflated. These incidents often emerge in cases of fraudulent loans. To curb such fraudulent practices and prevent the overvaluation of assets, new regulations have been implemented for collateral assessment. Hence, institutions tasked with evaluating collateral must obtain prior approval from the Bangladesh Bank. No such policy existed previously."

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, lauded the new policy, stating, "This policy will be a positive development for the banking sector. It will enhance transparency in the assessment of collateral during loan disbursement, thereby strengthening the liability framework for banks."

Firms eligible to assess loan collaterals

To obtain registration with the Bangladesh Bank, collateral appraisers must either be a member of the Bangladesh Survey and Valuation Companies, Firms and Individual Concerns Association (BSVCFICA) or the Bangladesh Insurance Surveyors Association or have membership with at least one of the recognised professional organisations of the same type as deemed appropriate by the Bangladesh Bank.

Organisations that hold membership in both the Institute of Chartered Accountants of Bangladesh (ICAB) and the Institute of Cost and Management Accountants of Bangladesh (ICMAB) are also eligible to apply for enrollment.

Collateral valuation institutions should have a team of skilled and experienced manpower, including accountants, civil engineers, mechanical engineers, diploma engineers, and trained surveyors, as applicable, to conduct accurate and reliable valuations.

To be eligible for enrollment, valuation institutions and key individuals associated with the institution, such as directors, managing directors, and chief executive officers, must maintain satisfactory Credit Information Bureau (CIB) reports. Any individual identified as a loan defaulter will disqualify the institution from enrollment.

If any individual associated with the ownership of the institution, has been convicted of financial irregularities or criminal offences or has received any fines, the institution will be ineligible for registration. However, if three years have passed since the completion of the sentence, the institution may apply for registration.

Dr Shah Md Ahsan Habib, professor selection grade at the Bangladesh Institute of Bank Management (BIBM), told The Business Standard that overvaluation renders collateral ineffective in recovering unpaid loans, leading to financial losses for the bank. The appointment of independent collateral appraisers from the central bank's list can effectively curb such irregularities and safeguard the bank's interests.