The real estate and housing business has been in the doldrums for around a year. The business has met with this fate since Nepal Rastra Bank issued stringent directives on this business last year in order to stop artificial skyrocketing prices of land and buildings. As per the directives, housing and real estate loans have to be restricted to 30 per cent of the total portfolio by the end of this fiscal year and to 25 per cent by the end of the next fiscal year.

Driving force
Bank financing is a driving force behind housing and real estate transactions. In a country like Nepal where majority of the people are living a hardscrabble life, there are very few people who can afford a house. For such people, bank financing has become an easy means of scraping together funds required for building or purchasing a house. Real estate businessmen also rely on bank financing to carry on their business.

With the directives in force, banks are unable to make adequate investments in housing and realty sectors so much so that some banks are finding it arduous to bring their housing and real estate loans to the level as required by the directives. Furthermore, a hike in interest rates has made housing and real estate loans - and for that matter other loans as well - costly, making it difficult even for the existing loan clients to repay their loans.

What’s more, a housing or realty loan can be renewed for one year after 25 per cent of the loan - together with all the outstanding interest - has been repaid, creating an additional financial burden on the loan clients.

Besides, there are other bottlenecks that are acting as a stumbling block to the growth of housing and real-estate transactions. Income sources need to be declared for the purchase of land costing Rs. 2.5 million or above and for the purchase of a house costing Rs. 5 million or above. There is a compulsion for people to reveal sources as per the Anti-Money Laundering Act-2064, whenever an amount of Rs. 1 million or above is deposited with a bank.

The liquidity crisis is still persisting in the banking sector. Most of the banks have stopped disbursing new loans for lack of liquidity. There is no satisfactory deposit mobilisation. At present, the credit-deposit ratio stands at 89 per cent, which should not, as per the NRB directive, exceed 80 per cent.

One of the reasons for this sorry state of affairs is sluggish government spending due to a delay in the promulgation of the budget. There is a fund of Rs. 28 billion in the government account. With imports outstripping exports and due to other factors, the balance of payments (BOP) deficit now stands at Rs. 5.03 billion.

The other reason is the provision for seeking sources while making a deposit of Rs. one million or above with a bank, creating a kind of psychological fear among the people and resulting in the informal banking sector flourishing or diversion of money to India. This has resulted in deposit rates increasing and a corresponding hike in loan rates. In consequence, most people are not in a position to afford bank loans.

The government has also introduced a capital gains tax on housing transactions of Rs. five million or above. This provision may also be considered a hindrance to housing transactions. The main target of revenue mobilisation of the government seems to be through taxation. At present, every remuneration is taxable, at least at one per cent of the total remuneration. The government has also hiked property tax.

The government is fully aware of the fact that people resort to tax evasion by undervaluing their property. To discourage such undervaluation, the government has made provision for buying the property itself if it deems it highly undervalued. This measure is not, however, viable because people have rights to sell their property at whatever prices they like. Government interference in such cases is highly undesirable.

Government valuation of property is far from its actual, or market, value. If the government thinks that a property is undervalued and tax evasion is suspected, then it should value property realistically so that tax can be levied as per the government valuation rather than as per the selling price.

To encourage the growth of housing transactions, personal housing loans should be segregated from real estate and commercial housing loans because it is the common people, not businessmen, that take loans to build or purchase houses. Today, the prices of land and buildings are high. As such, the existing provision for seeking sources should be relaxed. Sources should not be sought for land transactions up to Rs. 10 million and for land and building transactions up to Rs. 20 million.

To stimulate deposit mobilisation, the provision for seeking sources for deposits of Rs. 3 million or above should be in place. The capital gains tax should be scrapped. Steps need to be taken to avert the current liquidity crunch. Bank rates need to be lowered to an affordable level (which is possible when the liquidity situation eases). The current provision for renewing housing and real estate loans after repayment of 25 per cent of the principal and all the outstanding interest should be annulled. Renewal of such loans should be allowed on a par with other loans.

Positive changes
Nepal Rastra Bank has, however, hinted that it is making some changes in the housing and real estate policy. Positive changes will definitely help revive the now stagnant housing and real-estate sector.

by:Uttam Maharjan