With the state declaring 2012/13 as Nepal Investment Year, outwardly it seems a good time for investment — however, the real estate sector begs to differ. The once booming realty, that is now struggling to stay on its feet, is further pressurised by inability to pay back loans to financial institutions. The Banks and Financial Institutions (BFIs) are finding it difficult to recover mortgage from realty, as transactions have steadily dipped, with only Rs 345.07 million being collected from the valley as revenue in the first quarter of the financial year 2011/12.This is a drop by 17.26 per cent as compared to the same time the previous year.

Although Nepal Rastra Bank (NRB) extended the time limit for BFIs to adjust interest recovered within mid-November in their balance sheets of the first quarter (within midOctober) as ‘deferred cash,’ it is not likely to encourage such flexibility in the future.“We had to take such measures just to help banks maintain public faith. The loan exposure to real estate by BFIs was supposed to be brought down from 75 per cent to 25 per cent by this time. However, we have extended it by a year, taking into account the slump in realty,“ says Purna Bahadur Khatri, director of Banks and Financial Institution Regulation Department at NRB.

Khatri adds, “NRB is trying its best to help BFIs. For this, we have categorised real estate as commercial, personal, et cetera and have included loans below Rs 10 million under home loans These policies have been revised just to help realty and financial institutions, which have a credit of Rs 100 billion waiting to be recovered.“

NRB claims this move will maintain consistency among banks and prevent their balance sheet from deteriorating. “The extension will help BFIs limit the loan loss provision and improve profits,“ informs Khatri.

Nevertheless, BFIs feel the circular will provide only temporary relief and not a long-term solution. “However, it is better than nothing.The target of bringing down loan exposure in realty to 30 per cent, with gradual progress to 25 per cent, when initial loan exposure was 75 per cent, was unrealistic.

Though NRB has extended time limit to reach the goal, we are still finding it hard to retain ourselves to 30 per cent, so 25 per cent is a far-fetched dream,” says

Rajendra Man Shakya, president of Nepal Finance Companies' Association. According to him, the extension may help update balance sheets but will do nothing to motivate loan payback. He says, “Such drastic cut offs might also be major con tributors to the current real estate slump.“

The realty sector depreciation is worrying many, as 2011 was a disastrous 2011 was a disastrous year with hardly any prominent movement in transactions. In addition, NRB also claimed that realty prices were irrational and without proper ground in recent years. Expressing his views on the NRB directive, Prakash Bajracharya, managing director of Bajra Shangrila Residency, says, “This is a momentary relief, not a concrete problem-solver. There are hardly any transactions and the market is plagued with pessimism. The move by NRB only prolongs the death of realty, unless it brings about solid changes and better policies to save the drowning sector.” According to Bajracharya, the housing slump started with NRB restricting credit flow to realty. He says, “There are several factors contributing to realty’s difficulties — limiting the bank credit limit to 30 per cent from 75 per cent, the loan interest rate surging up to 16 per cent, and public perception of realty as a shaky investment. Though the circular might have bought time for balance sheets, the question is whether or not real estate will be able to pay back credit.” The sector is still mired in confusions, with each decision pushing consumers further away from investing in it. The point is whether real estate will drag down the financial sector, or whether they will manage to stay afloat.

source:Koirala, Sneha (2011),"Striving to Stay Afloat:Real Estate Woes Spreading to Financial Institutions", The Himalayan Times,14 Jan 2012