Fewer borrowers are now using land and buildings as security to acquire loans, as banks and financial institutions tightened the screws on extension of credit on the back of real estate in the aftermath of the earthquakes of April and May.

Only 44.24 per cent of the loans were extended against the security of land and buildings in the first quarter of this fiscal, the latest macroeconomic report of Nepal Rastra Bank shows. In the same period last year, 59.56 per cent of the loans were issued on the back of land and buildings.

“Credit extension against security of real estate has fallen because banks have now made it mandatory for borrowers to submit documents such as building completion certificate. This provision was introduced after the devastating earthquakes caused damage to houses and buildings located in various parts of the country,” Sanima Bank CEO Bhuvan Kumar Dahal said. “But the problem is that not many owners of houses and buildings have this document, hence the fall.”

Although reduction in share of loans extended on the back of real estate indicates diversification in types of securities being used to acquire loans, not all may be in favour of this trend as land and buildings are considered more secure than other types of collateral and their prices also tend to appreciate most of the time.

With the fall in ratio of credit extended against security of real estate, the portion of loans issued on the back of fixed assets also tapered.

In the three-month period between mid-July and mid-October, only 63.35 per cent of the credit was issued against fixed assets. In the same period last fiscal, 73.75 per cent of loans were extended against security of fixed assets. Fixed assets refer to land and buildings, machinery and tools, furniture and fixture, and vehicles, among others.

Although the portion of total loans issued against security of fixed assets fell, the ratio of credit extended on the back of vehicles went up.

Around 17.19 per cent of the loans extended in the first quarter of this fiscal year were on the back of vehicles. In the same period last fiscal, only 7.07 per cent of the loans were issued against the security of vehicles.

Among others, bigger portion of loans were extended against security of raw materials. Around 7.18 per cent of the loans were extended against the security of raw materials in the first quarter of this fiscal, as against 2.46 per cent in the same period last fiscal.

Also, 4.48 per cent of the total loans were issued against non-government securities, such as shares and corporate bonds, in the three-month period this fiscal, as against 0.88 per cent in the same period last fiscal.

Banks and financial institutions extended Rs 33.37 billion in loans in the three-month period between mid-July and mid-October, down 53.77 per cent than in the same period last fiscal. Credit demand has been falling ever since the earthquakes hit the country. The demand for loans has further come down since the protests began in the Tarai in mid-August.

source:the himalayan times, 24 nov 2015