The central bank's directive to prevent the over heated real estate bubble from bursting has seri ously affected the real estate sector especially private housing development compa nies. The central bank cap to lim it aggressive loan exposure to 25 per cent of each bank's total in vestment portfolio by the end of the fiscal year 2012/13 is a challenge. As per directives issued by the central bank, their exposure to real es tate and housing loans al together shouldn't ex ceed 40 per cent.

With the imposition of the directive, which has discour aged banks from investing in the sector, Nepal's realty sector witnessed negative growth in business. While the govern ment has been stressing that one of the reasons for the liquidity crunch was commercial banks' ever-increas ing lending to unproductive sectors, bankers are of the opinion that the move on the part of the central bank was mandatory to avoid systemic risk caused due to over concentration of lending in one sector. Meanwhile the concerned parties all agree that a new provision will help correct the escalat ing real estate price to some extent.

Private land and housing development companies are now in the wait and watch mode and eagerly awaiting the government's next move and decision in this regard.


According to the president of Nepal Land and Housing Developers' Association (NLHDA) and chairman of Civil Homes Ichchha Raj Tamang, the directive has badly affected the business. Business has declined by around 80 per cent. "The central bank's move is correct to some extent to control the artificial price hike in the sector," said Tamang. However, he says that the directive was brought about without sufficient prior study. "Instead of taking such a harsh move the government should have come up with cer tain control mechanisms to control the unhealthy practices in the sector," he added. Stating that thousands of people are being employed in construction jobs and that many industries related to construction were being supported by the real estate sector, Tamang said blaming their sector as an unproductive sector was baseless.

"Directly or indirectly, the directive has discouraged the banks to invest in the real estate sector," said the third vice president of NLHDA and chairman of Comfort Housing Om Rajbhandary adding that most of the banks have stopped loans for both developers and consumers. He added that those providing loans have imposed higher interest rates making it unaffordable for the general public to purchase a new house. According to him, currently, there are around 150 real estate and housing companies operating in Nepal. "The annual demand for hous es and apartments stand at around 40,300 units while the valley alone re quires about 21,000 units," he in formed. He said the real estate sector is constructing barely 15,000 units per year.

Concerned about the substantial impact of the directive on this sector, Rajbhandary said, "We are compelled to put on hold our new projects due to the imposition of the directive," adding that for the time being they have confined operation to work on old projects.

While, he admitted that there was an unhealthy practice in the sector due to investors' over confidence in the sector, Rajbhandary has urged the government to pay due attention to the issue on time and maintain a conducive environment for the industry.

Citing that the directive alone is not the solution to the problem, Tamang urged the government to create a good control mechanism to run the real estate sector in a disciplined way. Claiming that the banks have failed to gain people's confidence, he informed that the NLHDA has already submitted several points of demand including scrapping of the ceiling fixed by NRB on real estate and housing loans. "The entire economy of the country will suffer if the government does not address this issue by the new fiscal year," he warned.

courtesy: Surendra Tandukar,The Himalayan Times,May 22 2010