At the beginning of our banking career, I met one executive from Agrani Bank (apologize for not remembering his name) who came to take classes in our training session at BIBM (Bangladesh Institute of Bank Management). While discussing the issue related to challenge the bankers face in ensuring physical verification of mortgaged property, he narrated to us one of his bitter experiences. His experience seems to be a perfect case study of the problem. Bankers, particularly those who are involved in property inspection activity and preparing valuation certificates thereof, may be interested in it.
The incident, to describe briefly, is: One businessman was in need of borrowing money from bank. In support of his loan application, he was supposed to provide land and building from a posh residential area of Dhaka city as collateral security. The businessman did not have any land and building in the area and only had a small piece of land in West Dhanmondi. However, he knew an old lady who had a well-furnished four-storied residential building at the centre of Dhanmondi residential area. He approached the old lady saying that he had a grown-up daughter for whom a potential bridegroom had been selected. Bridal party's only preference was that bride's parents should have their own house in Dhaka city. If the lady would kindly allow he could tell the bridal party that the house belonged to him and their daughter's marriage could be settled. In our society, daughter's marriage is looked upon with sympathy and the lady also became sympathetic and agreed to the proposal.
One day that businessman arranged a lunch with varieties of delicious items and the old lady was simply supervising the serving of lunch. It is common practice in our country to offer heavy lunch to entertain either property inspection team from bank or a bridal party. So the innocent lady did not have any idea about whether the guests are bankers or members of the bridal party and she did not also want to know the identity of the guests.
Anyway, a team from the bank came, moved around the property, discussed about the house, had a good lunch and went back issuing a nice inspection/valuation certificate. Based on the property documents submitted by the borrower, valuation certificate issued by the bankers and legal opinion, mortgage formalities were completed and loan was disbursed.
After a couple of years, the account assumed non-performing status and when bank started initiating legal action, it was unearthed that the property mortgaged and the property inspected were two different places. Result of such a callous approach by the bankers is well-known. However, from a practical point of view, it is very difficult for the bankers with ordinary educational background to appropriately identify the right property. Property's holding number, plot number, jurisdictional demarcation (mouja), C.S. Khatian, S.A, Khatian, R.S. Khatian, mutation certificate, relevant map, etc., are so complicated affairs that only experts with wide experience in handling land documents can ascertain the appropriate location of the property.
The above experience narrated by the senior banker in our training session may either be a fact or just a story to explain the importance of property inspection by the bankers. However, the submission of duplicate property documents, mortgage fraud, third-party mortgage without proper consent from the property owner and mortgage with fake documents are common irregular practices in our country's banking industry.
COLLECTION OF PROPERTY DOCUMENTS: Mortgage of land and building as collateral for bank loan has to go through five different stages which comprise (i) collection of documents included, (ii) physical verification of property, (iii) reviewing of documents, (iv) obtaining legal opinion and (v) registration of mortgage.
Bankers initially collect all necessary documents related to the property offered as collateral security. This is really the most complicated task because there is no specific formula or standard list of documents to be collected. Nature and type of documents widely vary from property to property. For example, property allotted by RAJUK without any ownership change will always have simple form of documents while the property owned by several generations or handed over to some owners will have a complicated form of documents.
However, common form of documents includes deed, bia deed, RS/CS/BS Parcha, mutation certificate with up-to-date rent receipt, municipal/city corporation certificate with holding number, copy of map, approved plan, etc. In addition, a valuation certificate issued by a qualified engineer is also submitted.
The second step is to physically verify the property submitted as mortgage for collateral security. Here prime responsibility lies with the bank officer who visits and prepare valuation certificate. It is the banker who will identify the right property as per documents submitted. This is really a very challenging task because synchronising the location of property with the description given in the property documents is a very complicated affair. It is very difficult and at times almost impossible for an ordinary banker to successfully accomplish the job. Moreover, property location may change rapidly and the concerned officer may not be able to locate it properly.
In my banking career, I have visited innumerable properties and issued valuation certificates. If I am now asked to identify those properties, I may not be able to find them. So a banker should be relieved of this responsibility. This can be done by introducing collateral locking system. But until this system or any other alternative system is developed, the officers working in loan administration department will have to continue doing the job. As a precautionary measure, the banker, while inspecting the property, should verify the holding number carefully and tally it with the neighbouring property, compare it with approved plan or map and finally, provide the description of surrounding properties as well as major landmarks in the valuation certificate.
REVIEWING OF PROPERTY DOCUMENTS: Reviewing of property documents is another complicated job as it requires thorough understanding of land laws and structure of the property ownership, both of which are difficult jobs. Clear conception about deed and bia-deed, different types of parchas like RS, CS, BS, etc., and mutation certificate help the bankers in carefully reviewing the documents. While reviewing documents, weightage must be given to the ownership of the property. Although property documents are referred to the lawyers for their vetting and final opinion, their opinion is solely based on the documents initially collected and reviewed by the bankers. In my experience, I noticed some cases where mortgage of fake property was unearthed even after favourable legal opinion. So, legal opinion does not guarantee against mortgage fraud.
Mortgage formalities are completed with the acceptance of land and building collateral security. This is also a complicated task involving application of several laws/acts including transfer of property act and registration act.
Moreover, there are different types of mortgages, including equitable mortgage, token mortgage and registered mortgage. Although equitable mortgage and token mortgage are not legally acceptable, yet these two forms of mortgages used to be very popular in banking sector in order to avoid cost-intensive registered mortgage. Equitable mortgage is executed through submission of all original documents accompanied by executed power of attorney. On the other hand, token mortgage is formal registered mortgage and only difference is that instead of entire loan amount, nominal amount of loan is included in the mortgage deed so as to avoid high stamp duty; the remaining loan amount is covered by executing a deed of agreement. Registered mortgage is the legal mortgage which is registered for the full value of the loan amount. Subsequently, the systems of equitable mortgage and token registered mortgage were discontinued and only registered mortgage is effective now. The registered mortgage is a legal matter and is considered as a cost burden for the borrower because entire loan amount is covered under mortgage deed for which heavy stamp duty is to be paid. Even redemption of registered mortgage is a complicated and cost-intensive measure. Because of being a complicated legal measure with high cost burden, many borrowers do not agree to execute registered mortgage, rather they take resort to alternative easy means which eventually weakens collateral security arrangements. Time has come for the bankers and policy makers to revisit conventional mortgage system and introduce standard collateral security arrangement - and collateral locking may be part of it.
Nironjan Roy, CPA, CMA is a banker based in Toronto, Canada.
He may be reached at: [email protected]
