MONETARY BOARD

CENTRAL BANK OF SRI LANKA

FINANCE BUSINESS ACT DIRECTIONS

06 June 2018
No. 4 of 2018

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VALUATION OF IMMOVABLE PROPERTIES

In terms of powers conferred by section 12 of the Finance Business Act, No. 42 of 2011, the Monetary Board issues Directions on the regulatory framework on Valuation of Immovable Properties of Licensed Finance Companies (LFCs).

1. Scope of the direction

1.1 These Directions on valuation of immovable properties shall be applicable for the purpose of:

a. Meeting the regulatory requirements issued under the Finance Business Act, No. 42 of 2011 and,

b. Other on-going business requirements of LFCs which necessitate valuation of immovable property

2. Establishment and Implementation of a policy on valuation of immovable property

2.1 Every LFC shall ensure that appropriate board approved prudent policies and procedures on valuation of immovable property are in place.

2.2 In establishing policies and procedures on valuation of immovable property as referred to in Direction 2.1 above, every LFC shall consider the following minimum requirements.

a. Responsibility of the Board of Directors, senior management and other relevant committees (e.g., Credit Committee) on the formulation and periodical review of the policy.

b. Appointment of panels of valuers, both internal and external.

c. Procedures to identify and select qualified valuers for the appointment of panel(s) of valuers, subject to Direction 4 below.

d. Procedures to assess the reasonableness of the market value of an immovable property derived from the valuation model and, the reliability and the accuracy of data used for such valuation.

e. Threshold for internal and external valuation reports obtained/to be obtained in respect of immovable property against all loans and advances, as the case may be, subject to Direction 5 below.

f. Frequency of valuation, subject to Direction 6 below.

g. Valuation criteria for internal valuations.

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3. Immovable Property

3.1 For the purposes of these Directions, immovable property shall mean any land, land and building or any rights therein which are acquired or held for the purposes including the following:

a. Land, and land & building which are obtained as collateral against any accommodation extended by any LFC including foreclosed properties.

b. Land, and land & building which are purchased or acquired for the purpose of conducting business of LFC which are measured and disclosed in accordance with Sri Lanka Accounting Standards, e.g., LKAS 16: Property, Plant and Equipment.

c. Land, and land & building which are purchased or acquired as LFC's investments, which are measured and disclosed in accordance with Sri Lanka Accounting Standards, e.g., LKAS 40: Investment Property.

4. Eligibility criteria for valuers

4.1 Every LFC shall ensure that:

a. Eligibility criteria for valuers are set out as follows.

a.1 A member of the Institute of Valuers of Sri Lanka (IVSL) who shall be:

i. A Fellow member; or

ii. A Graduate member with 5 years’ experience in such grade of membership; or

iii. A Graduate member who has been an Associate member at the time of his admission to the Graduate Membership, with number of years of experience equivalent to the period that the member would have taken to complete 10 years in the

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5. Threshold for internal and external valuation reports

5.1 An LFC shall establish an appropriate threshold for internal and external valuation in respect of immovable property.

5.2 In the case of a non-performing loan, an internal valuation report could be obtained in respect of facility/ies where the capital outstanding amount is less than Rs. 1,000,000 or 0.1% of the LFC's capital base, whichever is less.

6. Frequency of valuation

6.1 The frequency of valuation of immovable property shall be as follows.

a. Valuation of immovable property obtained as collateral against loans and advances which are non-performing shall be not more than three years old.

b. Valuation of immovable property as referred to in Directions 3.1 b) and c) above shall be made:

i. Annually depending on any significant and volatile changes in fair value of such immovable property are experienced; or

ii. At least once in every three years.

7. Independence and Disclosure

7.1 Every LFC shall ensure the independence of external valuers and that disclosures are made in the LFC's Annual Report or in the Audited Financial Statements as set out below.

a. An external valuer shall not be a related party, to avoid any conflict of interest that may arise from such engagement.

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Associate Membership; or

iv. An Associate Member with 10 years’ experience in such grade of membership.

a.2 A member of the Royal Institution of Chartered Surveyors of the United Kingdom (RICS) who shall be:

i. A Fellow member; or

ii. Any other member of RICS with 3 years’ experience in such grade of membership.

b. Valuation of immovable property undertaken by internal valuers shall satisfy the eligibility criteria set out in Directions 4.1 a) above.

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b. The Board of Directors/senior management shall ensure that disclosures are made in the LFC's Annual Report or in the Audited Financial Statements on the valuation policy, measurement and recognition of immovable property.

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Dr. Indrajit Coomaraswamy
Chairman of the Monetary Board and
Governor of the Central Bank of Sri Lanka