Rethink begins on realty loans

KATHMANDU, July 9: Nepal Rastra Bank (NRB) has initiated consultations on allowing banks and financial institutions (BFIs) to renew real estate loans even if they realized just the interest amount in order to prevent them from rise in loan defaults.

The exercise has begun mainly after the High-level Committee monitoring the financial sector headed by the Finance Minister advised NRB to relax its stringent policy on real estate lending.

Under its recommendation, the committee has advised the central bank to consider the possibility of allowing BFIs to renew the loans for a year if they have managed to realize the interests accrued so far.

“We have started consultations over providing such flexibility but no conclusion has been reached as yet,” said NRB Spokesperson Bhaskar Mani Gyawali.

Sources informed Republica the central bank is looking at the proposal positively, particularly given the present liquidity crunch and possible future adverse impacts that the BFIs might face due to long-stagnant real estate market.

Given the current slump in the realty market, bankers have complained they are facing difficulty in recovering loans. This has exposed them to the risk of suffering a sharp rise in non-performing loans, something which could disfigure their financials badly.

Top NRB officials said they are also wary of such possible negative outlook of the financial sector, especially development bank and finance companies that have as much as 70 percent exposure to the sector.

“Our anxiety is: how will the market respond to such impacts, particularly as general depositors are already showing little confidence in the financial institutions,” said the official.

The real estate market slumped in gloom after NRB imposed a cap on realty loans exposure, and asked BFIs to restrain from lending in the vulnerable and speculative land transactions about one-and-a-half years ago.

As the cap was imposed with an aim to correct the realty market from overheating showed its impact; realty developers are finding fewer buyers and have stopped repaying loans. Nepal Land and Housing Developers Association (NLHDA) has termed the policy faulty, and asked the government to scrap it.

In a meeting with Prime Minister Jhalanath Khanal on Friday, a delegation of NLHDA asked the government to allow developers to restructure their loans for at least a year.

We request the government to scrap the cap imposed on the realty loans. Instead of such a cap, we also appeal to the government to make it mandatory for BFIs to issue at least 40 percent of their total loans to the housing, real estate and rural township development, reads a memorandum that the association handed over to the PM.

The association has argued that the boom in real estate market had helped the country receive more remittances and investments from non-resident Nepalis (NRNs). The slackness in the sector, on the other hand, has spurred capital flight, it has stated.

Given the situation, it has also asked the government to exclude housing loans up to Rs 12 million and real estate (land) loans up to Rs 7.5 million taken for personal residency from the category of speculative real estate loans.

It has further urged the government to withdraw capital gain tax and income disclosure provision imposed on land and housing transactions.

The association has also lobbied the government to open apartment sales to foreign nationals as well. It has also sought to raise the volume of deposits attracting income disclosure provision to Rs 5 million from existing Rs 1 million.

Source:myrepublica

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