Nepal Rastra Bank´s inspections have revealed that some of the commercial banks are issuing loans to the real estate business, but under different headings in an attempt to escape the central bank´s directives that aims to tighten loans in the sector. “This is a worrying trend. We found it after we carried out inspections of some seven commercial banks over the first three months of the current fiscal year,” said a senior official at NRB. He elaborated that banks involved in such practices mainly were issuing loans under different categories, particularly ´others´, while the study of loans file showed lending were made in the real estate sector. Those banks were even found to be issuing overdrafts to the real estate clients to enable them serve principal and interests. “Our inspections showed that loans flow of the banks resorting to such practices have particularly swollen under the heading like overdraft and business loans,” said the source. The source, however, refused to disclose the names of those banks. Following such revelation, the central bank has issued instructions to all those banks to correct their practice. NRB had tightened loans in real estate and housing after massive flow of loans in the sectors helped to create bubble, threatening to hurt banks themselves. To rein in the situation, it imposed ceiling on banks and financial institutions loans exposure in the sectors, asking them to lower it to 25 percent and 10 percent respectively by the end of the next fiscal year. “We are alert at nipping this wrong practice at the very beginning. We have intensified our vigilance,” said the official. Going by the existing regulations, banks can issue as much overdraft and business loans against collateral. Apart from that, the trend of loans issued against personal guarantee too has risen in recent months. The records of NRB show that volume of loan flow by the commercial banks have increased substantially since mid-July 2010, even though banks have been complaining over shrinking of investment avenues. According to the statistics, commercial banks loans to different sectors have soared to Rs 487 billion in the first week of November, up from Rs 465 billion in mid-July. Their deposits, on the other hand, have shrunk to Rs 618 billion from Rs 624 billion over the period. As this has hit liquidity position of the banks, banks are relying heavily on inter-banking lending to manage their liquidity. This has caused the inter-bank rate to jump to some 10.5 percent. “Banks are still in a position to issue loans, but only at higher rates,” said Rajan Singh Bhandari, vice president of Nepal Bankers´ Association.
source: republica