Hopes to prevent high risk investment in real estate

Nepal Rastra Bank (NRB), the country's central bank, is tightening the country's monetary policy to discourage financial institutions from further investing in real estate without considering the risks.

The International Monetary Fund (IMF) had said Sunday that the loose monetary policy adopted by NRB had, to some extent, contributed to boost real estate prices.

IMF had also warned that decline in real estate prices would have a negative impact on banks and their output growth.

Talking to the Post, NRB Acting Governor Krishna Bahadur Manandhar said the central bank had increased 'risk weight' provisioning to 150 percent in the real estate sector against 100 percent in other portfolios.

He informed that NRB had also increased cash reserve ratio (CRR), the minimum reserves a bank must hold to deposits, to 5.5 percent from five percent to discourage banks and financial institutions from investing in high risk ventures.

NRB said 13 percent of Nepali banks' investment was in the real estate sector, which could not be termed 'massive'.

However, Manandhar said that some banks had invested up to 40 percent in the retail sector. "Especially new banks as well as some old ones have high investment in the retail sector," he said.

President of Nepal Banker's Association Radhesh Pant was of the view that banks should be more cautious in investing in real estate and NRB should monitor the banks closely.

Banks should make correct valuation of the collateral given that real estate had been witnessing a bubble for the last few years, Pant said.

Pant, who also heads Bank of Kathmandu, stressed the need to diversify investment among various portfolios to minimise risk.

It should be noted that the current global financial crisis started from the real estate sector after financial institutions investing heavily in sub-prime and other high risk mortgages were hit by high rate of defaults after housing prices in the U.S. dropped significantly.

Another concern of IMF was the growing number of financial institutions licensed by NRB, which, it said, was putting NRB's supervisory soundness under strain.

Manandhar said NRB could not prevent any bank from coming into the market if it fulfilled the set criteria.

He said that NRB had increased capital adequacy to Rs. 2 billion for commercial banks just to start their operation from the earlier requirement of Rs. 1 billion in order to discourage the launch of new banks.

"We have also provisioned for disclosure of income sources of new investors in banks," he said. "And yet, we have failed to stop new banks from coming into the market."

Three new national level commercial banks and 32 other financial institutions are currently awaiting the central bank's approval, according to NRB. There are 25 national level commercial banks already in operation.

Manadhar was also confident that inflation would decline to a single digit although IMF had predicted it would hover at around 11 percent. "Inflation has already reached its highest level. It cannot grow at the same level this year," he said. "Given the global economic slowdown and the nosedive in petroleum prices, inflation is certain to go down," he added.
Source:
Ekantipur