The portion of real estate loans in the financial institutions’ portfolio has remained almost static even though lending to it is half the limit than what has been prescribed by the central bank.

In the beginning of last fiscal year, the amount of loans floated to the real estate sector comprised of 13.8 per cent of the total loan portfolio at Rs 98.8 billion, which by the end of 10th month of last fiscal year covered about 12.4 per cent amounting to Rs 95.09 billion, according to Nepal Rastra Bank (NRB)’s statistics. Total lending of the financial institutions stood at around Rs 764 billion till mid-May.

Though the amount of loans floated to the real estate sector is way below 25 per cent of total lending –– a limit set by the NRB –– financial institutions are wary from extending more loans. “Though there is enough space for financial institutions to further finance projects, they are wary about financing more projects due to lack of trust,” lamented president of Nepal Land and Housing Developers Association Ichhya Raj Tamang.

By the 10 months of the last fiscal year, commercial banks had floated loans worth Rs 69.84 billion to the realty sector, while development banks and finance companies had floated Rs 11.42 billion and Rs 13.83 billion, respectively.

In comparison to the beginning of the previous fiscal year, in the 10 months, both development banks and finance companies were able to reduce their exposure to the real estate sector significantly. But lending by commercial banks witnessed a little increment due to their rising deposits.

Tamang pointed out that the realty sector is in need of more finance and has become stagnant due to lack of finance, and ongoing projects have been put on hold which will further deepen the real estate crisis. “If the financial institutions, that are flush with liquidity but unable to find new projects to finance, can channel their funds to the sector once again, it will be beneficial to both,” he added.

In December 2009, the central bank directed the financial institutions to restrict credit flow to a single sector to up to 25 per cent of their total lending due to the fear of an eventual systemic failure because of overexposure to realty business.

The banking sector has taken the brunt of the cooling off of the realty market since the last two years as the loan default rate and Non Performing Loans have since then been growing.

The central bank governor Dr Yubaraj Khatiwada also expressed that there is no bar on lending to non speculative housing sector, if financial institutions’ portfolio has less than 25 per cent of lending to the sector.

The loans floated by the financial institutions to the public under the heading of Personal Home Loans comprised 14 per cent in the first 10 months of the last fiscal year.

The financial institutions had lent Rs 47.6 billion till mid-May, while in the beginning of the fiscal year it stood at Rs 41.6 billion. The central bank had expanded the ceiling on home loans that are not calculated as real estate loans to Rs 10 million from Rs 8 million in January in expectation of igniting demand. Despite the raised ceiling, the interest rate on home loans stood at around 12 per cent to 16 per cent discouraging the public.

source: The Himalayan Times,2 August 2012