NRB tightens lending exposure

In a bid to put a check on financial institutions' over exposure on real estate and housing loan, Nepal Rastra Bank (NRB) on Thursday issued new directives, putting ceiling on lending. As per the new directives, financial institutions now can't lend more than 25 percent on real estate sector. And their exposure to real estate and housing loan shouldn't cross over 40 percent.

The central bank's move comes amid growing concern over the loan exposure of financial institutions on real estate sector. The NRB also instructed the financial institutions to lend money for housing and real estate not exceeding 60 percent of the fair market value of the property. It has also set timelines for the financial institutions to reduce their exposure on real estate and housing loan. As per the NRB directives, financial institutions have to reduce real estate loan to 15 percent by mid-July 2011 and to 10 percent by mid-July 2012. Similarly financial institutions have to downsize both real estate and housing loan to 30 percent by mid-July 2011 and to 25 percent by mid-July 2012.

Bankers have termed the directives as practical solution. According to Sashin Joshi, President of Nepal Bankers' Association, the NRB directives have given a clear message to the financial institutions not to overexpose to the real estate. "It was necessary to avoid systemic risk due to over concentration of lending in one sector," said Joshi. The timeline set by the directives to reduce the loan exposure will help avoid panic in the banking sector.

Bankers said the NRB move will also help correct the escalating real estate price. "It would also discourage financial institutions from additional lending to the real estate," said Joshi. On Wednesday, the government had said that one of the reasons of liquidity crunch was commercial banks' ever-increasing lending in unproductive sectors. The ministry had said that capital deposit ratio (CD Ratio) of six banks to have been more than 100 percent.

The central bank has been asking the commercial banks to be stringent in providing real estate loans. As per NRB estimates, the commercial banks have invested 20 percent on average in the real estate sector. "Some of the banks have even higher percentage of exposure in the real estate," said the official. According to NRB, out of 26 commercial banks, seven have invested more than 25 percent of the total loan in real estate sector.
Source:eKantipur