NRB's policy on taming real estate lending bears fruit
RUPAK D SHARMA
KATHMANDU, Dec 8: The exposure of commercial banks to the real sector has come down by a third in the last one and half years, while demand for home loans of up to Rs 10 million is gradually picking up, indicating the central bank´s measure to contain speculative realty lending without affecting genuine homebuyers has borne fruit.
Lending to the real estate sector started surging since the end of 2008, when land prices, especially in Kathmandu Valley, started rising overnight.
As the bubble started getting bigger, commercial bank loans to the real estate sector topped Rs 63.26 billion by July 2010, up from Rs 49.99 billion in October 2009, figures compiled by commercial banks show.
Since most of the credit was being used for speculation, Nepal Rastra Bank, in September 2010, instructed all banks and financial institutions to bring down their realty credit exposure to 30 percent of the loan portfolio by mid-July 2011 and 25 percent by mid-July 2012.
To further control haphazard lending, the central bank also asked banking institutions to put a 60-percent cap on loans issued against real estate. This barred borrowers from obtaining loans in excess of 60 percent of the fair market value of real estate pawned as security. But, at the same time, to avoid genuine homebuyers from feeling the heat, the central bank fixed the home loan cap at two-third of the value of the real estate pledged as collateral.
These measures, introduced to discourage speculative lending, soon created panic in the market, as many feared drop in funding supply for ongoing real estate projects. To restore calmness, the central bank then said the new set of instructions would not apply to loans that were being processed.
Because of this move, the regulation brought by the central bank did not have immediate impact on the market and lending to the real estate sector continued to surge. And by October 2010, commercial banks had pumped in Rs 97.51 billion in loans to the sector. This trend continued for a while and by mid-January 2011 the lending to realty sector surged to an all time high of Rs 98.96 billion, which was almost 20 percent of the loan portfolio of banks.
At that time, DCBL, now known as Grand Bank, had the highest exposure to real estate, with 32 percent of total loans absorbed by the sector. Banks like Kumari, KIST, Sunrise, Prime, Citizens, Laxmi and NCC too had doled out over 25 percent of their total loans to the realty sector.
This kind of exposure generated fears of massive loan defaults, with pundits predicting creation of holes in balance sheets of many banks and pushing them to the verge of bankruptcy.
So far these prophecies have not come true, as banks, that were previously resisting central bank instruction, did not have any option but to gradually cut down their lending to the realty sector. Since then there have been improvements.
Latest data show commercial banks now hold Rs 67.65 billion in real estate loans, which is 10.4 percent of total loans issued by them. This amount also marks a decline of 31.6 percent from that of January 2011 when real estate lending had reached its peak.
Now, even banks that were overtly exposed to the sector have reduced their exposure to below 25 percent level. At the same time, outflow of home loans of up to Rs 10 million has been picking up, with the total amount expanding from Rs 30.83 billion in October 2011 to Rs 37.83 billion this October.
“It is good to know that commercial banks have slashed the portion of assets that could have generated grave problems, while giving priority to genuine people who want to purchase home,” Nepal Rastra Bank Spokesperson Bhaskar Mani Gyawali told Republica.
But not everyone is as contented as Gyawali. “We often hear a fairly large portion of loans extended to the real estate sector are in the guise of overdraft and term loans,” a banker told Republica on condition of anonymity, indicating the problem is not over yet.