The central bank has relaxed its regulations on real estate lending. According to the new directives issued by Nepal Rastra Bank (NRB) today, the banks and financial institutions (BFIs) are allowed to reschedule the real estate loans provided the borrower repay 25 per cent of principal along with all the accumulative interests.
Earlier, while discouraging the real estate lending due to over exposure risk — in December 2009 — the central bank had forbidden the BFIs to even reschedule or renew these loans.
However, the rescheduling or the renewal of the loans to real estate sector is valid for one year only and the BFIS have to complete the reschedule process of the eligible loans before the end of the current fiscal year, the central bank said.
In December 2009, to curb the over exposure of the real estate sector, NRB had restricted the BFIs’ credit flow to the sector as some of the commercial banks’ portfolio showed dangerously high amount of credit floated to the sector.
The central bank had to take the decision to reduce the lending to the sector to save the banking and financial institutions from potential risk of bubble burst.
According to the Nepal Economic Update published by World Bank (WB), "much of the new liquidity has gone into real estate creating a boom that involves speculative activities — often funded by banks and credit cooperatives." "Despite real estate being productive sector, it can be damaging for economy due to inflated prices," it said showing serious concerns over the limited supervisory capacity of the central bank and speculators aggressively borrowing from the banks and financial institutions to inflate the real estate prices.
Thus, NRB had directed the BFIs to trim down the lending to the real estate and housing to 40 per cent at highest, of their total credit to mitigate the market risk. "Some of the banks’ have even floated 100 per cent credit to the real estate sector, thus NRB had to intervene,” said Gopal Kafle, NRB’s spokesperson.
According to a banker, the central bank's new directive is a breather to the BFIs that have been in distress to prepare their balance sheet at the end of the fiscal year.
When BFIs have been finding it hard to recover the loans floated to the real estate sector resulting in high Non Performing Assets (NPA).
“Real estate entrepreneurs, who have also been unable to pay back the loans will also find respite," said the banker. "The regulation has been moderated considering the problems of both the bankers and the entrepreneurs,” Kafle said adding that "for rescheduling, at least 25 per cent of the principal with the interest has to be repaid." The NRB has, however, expected the BFIs to be careful while rescheduling the loans.
“The banks should reschedule the loans of those creditors, who have been showing good performance,” he added.