The Karnataka High Court has delivered a landmark verdict impacting the lending policies of State-run financial institutions by declaring the internal property assessment methodology of the Karnataka State Financial Corporation (KSFC) as illegal. In a significant move to protect borrowers, the court ruled that the KSFC cannot ignore the official guidance value fixed by the State government when assessing properties for mortgage loans. The court observed that the corporation’s practice of substantially lowering property values compared to the government-mandated rates was fundamentally flawed and detrimental to citizens.
Justice Suraj Govindaraj passed this order while hearing a petition filed by Parvati from the Vijayapura district. In this specific case, while the jurisdictional sub-registrar had notified a guidance value of ₹4.73 crore for the property, the KSFC had valued it at a mere ₹40.8 lakh. This internal valuation was less than one-tenth of the official market value recognized by the state for statutory purposes. The court found this disparity to be an administrative inconsistency that creates practical hurdles for loan applicants who offer immovable properties as collateral security.
The court rejected the KSFC’s long-standing contention that the guidance value is intended only for registration purposes and that financial institutions have the discretion to use conservative internal valuations for risk assessment. The judgment highlighted the unfair financial burden placed on citizens who are compelled to pay stamp duty and registration charges based on the higher guidance value but are denied a corresponding benefit when seeking a loan against the same property. This disparity, the court noted, places the borrower at a clear disadvantage by limiting the quantum of the loan they can receive.
Furthermore, the court clarified that while the KSFC may retain the discretion to undertake due diligence regarding a borrower’s creditworthiness, its determination of property value cannot proceed on a methodology that contradicts statutory values recognized by the State. The ruling specifies that the internal valuation formula—which often relies on a fixed percentage of agricultural land value—is only appropriate when no guidance value exists. However, for residential or commercial properties where the sub-registrar has notified a value, that figure must serve as the primary benchmark for assessing property value for lending.
