Karnataka HC rules state lenders must follow govt rates for mortgage valuation

The Karnataka High Court ruled that state-run financial institutions cannot charge stamp duty at government rates while simultaneously undervaluing the same property to reduce loan amounts.

Justice Suraj Govindaraj, in an order dated March 5, ruled that state-run financial institutions cannot adopt a “dichotomy” in which they charge high stamp duty at government rates but undervalue the same property when granting loans.

The petitioner, Parwati, sought a loan from the KSFC to start her own enterprise, offering 4 acres and 35 guntas of land as security.

She said that according to the guideline value, also known as the circle rate, set by the sub-registrar, her property was valued at approximately Rs 4.73 crore.

However, the KSFC applied its internal lending policy, which ignored the government’s market rates.

Using a conservative methodology typically reserved for raw agricultural land, the KSFC valued her property at just Rs 40.80 lakh, less than 10 per cent of the circle rate, drastically reducing the amount she could borrow.

“The adoption of a separate and substantially lower valuation methodology by KSFC, contrary to the guidance value recognised and applied by other instrumentalities of the state, cannot be countenanced either in law or on facts,” the court ruled.

Advocate D P Ambekar, appearing for the petitioner, argued that since the KSFC is an “instrumentality of the state” under Article 12 of the Constitution, it must remain consistent with other government departments.

As the sub-registrar had already certified the value of the property at a particular rate, the same value ought to be accepted by other state instrumentalities as well, he contended.

Ambekar argued that KSFC is undervaluing the property through its internal lending policy, which in turn restricts the petitioner’s access to credit.

This amounts to an unreasonable exercise of power by a state instrumentality, he claimed.

The KSFC’s counsel, Shivanand Patil, defended the policy, stating that lending institutions must be “conservative” to manage risk and that their valuation was meant only to determine “loan eligibility,” not market value.

Advocate Shivanand Patil, appearing for the authority, stated that the valuation carried out by it is not intended to determine the market value of the property, but only to determine the lending institution’s loan eligibility and risk exposure.

“Lending institutions necessarily adopt conservative valuation methodologies to ensure that the secured assets sufficiently cover the credit exposure of the institution,” he said.

The methodology adopted by the KSFC for valuing rural properties states that the base value of the land is determined with reference to its agricultural value, and thereafter an incremental percentage is applied depending on the proposed use of the property—either for industrial, residential, commercial or non-residential purposes.

The bench, in its order, noted that the methodology adopted by KSFC does not account for situations where the land has already been assigned a higher statutory valuation under the guidance value notified by the Department of Registration upon conversion.

The court in the order said, “The value of agricultural land is invariably lower than the value of converted land approved for residential, industrial or commercial purposes.

Once land is either converted or capable of being used for non-agricultural purposes, the valuation of such land is ordinarily determined not on an acre basis but on a square metre or square foot basis, which reflects the true market value of the land.”
The bench underscored that the guidance value issued by the Department of Registration serves as a statutory benchmark for the valuation of immovable property.

Justice Govindaraj then said, “A clear dichotomy was created because of the internal valuation adopted by KSFC for the purpose of sanctioning the loan, whereas the stamp duty payable on a registered mortgage deed has to be necessarily calculated on the basis of the guidance value determined by the sub-registrar.”
The order added, “This approach is that the borrower is placed in a manifestly disadvantageous position.

The citizen bears the financial burden of a higher valuation without deriving the corresponding benefit in terms of loan eligibility.”
Emphasising that administrative policies framed by instrumentalities of the state must ensure coherence, consistency and fairness in their application, the court in the order held, “The adoption of a separate valuation methodology by KSFC which disregards the guidance value determined by the sub-registrar cannot be sustained.”
Allowing the petition, the court directed the authority to consider Parwathi’s eligibility for a loan as per the market valuation by a sub-registrar.