Banks tighten belts

Financial institutions are facing dual pressure. On one hand they have to manage fund to handle liquidity crunch, on the other hand, they have to manage their loan exposure. After Nepal Rastra Bank's directives on Thursday, financial institutions have begun their exercise to manage their loan exposure to the real estate. And those, having relatively less exposure in the real estate have also started tightening the screws on real estate lending.

The financial institutions have begun to send messages to the lenders through phone and sms to reduce their loans. They have also started to inform customers about the increase on loan interests. "We are using this method to increase Chelibeti loan by reducing exposure on real estate," said Kamal Gyawali, managing director of KIST Bank. "We are planning to reduce real estate loan to 20 percent."

DCBL bank that has 38 percent lending in real estate, has completely stopped lending in this sector. It has also hiked the interest rate in real estate lending. "From the third week of December, we've hiked the interest rate in real estate lending," said Sudheer Khatri, Chief Executive Officer of the bank. As per central bank directives, the banks have to reduce their exposure in real estate to 25 percent by mid-July 2010.

"Since the definition of real estate is not clear, our loan exposure looked 30 percent," said Suman Joshi, Chief Executive Officer of Laxmi Bank. "In reality, our exposure is only around 20 percent and we have stopped lending in this sector for the last four or five months." According to Joshi, his bank had stopped lending to correct its operation modality. Bankers have claimed that their institutions are safe but the people have persisting apprehension. Nepal Development Bank's example shows financial institutions can be liquidated if they don't follow prudent banking norms.

"As of now, all the banks are safe," said Sashin Joshi, president of Nepal Bankers' Association. Since banks' capital base is larger, a loss of up to Rs. 100 million won't force the bank to close down, according to Joshi. That's why, the general public's deposit is safe, said Joshi. However, Joshi said that the banks will see a decline in their profits. "We've not been able to raise the interest in lending as compared to the increase in deposits," said Joshi. "Due to this, the bank's profit will plunge."

In order to manage the liquidity crunch, banks are hiking the interest rate in deposits, giving more than 10 percent interest on fixed deposits. Financial institutions are in the process of increasing interest rate on lending. According to Ram Shanta Shrestha, President of Nepali Finance Companies' Association, interest rate on real estate loan and housing loan will go above 16 percent and 15 percent, respectively.

According to Shrestha, most of the finance companies are safe. "Even if we're smaller than the banks, we're safe as we've been strictly monitored by the NRB," said Shrestha. Stock analysts say the decline in profits of financial institutions will affect in their share prices. "The share price of financial institutions might come down," said Rabindra Bhattarai, a stock analyst.
Source:eKantipur