Bank and financial institutions (BFIs) are expecting a relaxation in the policy of provisioning of bad debts in the wake of earthquake and subsequent aftershocks which is likely to hit their assets, mainly the loans that have been exposed to the real estate sector.

The earthquake of April 25 and series of aftershocks after the main quake have destructed private homes, housing and apartments where bank and financial institutions (BFIs) have floated their loans.

Though the exact level of damages in homes, housing, and commercial apartments is yet to be ascertained, bankers say the quake is likely to make serious impact on their balance sheets in the days to come.
"BFIs' exposure to real estate sector is high. Since the quake has damaged hundreds and thousands of homes, the borrowers will not be in position to repay their loans," a CEO of a commercial bank told Republica, requesting anonymity. "The buildings and homes that have been pledged as collaterals to BFIs while floating loans are also not in proper condition, eroding the assets quality. This will have significant impact on the balance sheet and profits of the BFIs in the coming quarters if policies are not adjusted accordingly in this critical circumstance," the CEO added.

According to Nepal Rastra Bank (NRB), BFIs floated loans amounting to Rs 170 billion in home loans and realty sector loans in the first eight months of the current fiscal year 2014/15. Their total credit expansion in the review period stands at Rs 1.25 trillion. The data, however, excludes many private housing loans below Rs 10 million, according to NRB Spokesperson Min Bahadur Shrestha.

Kishore Maharjan, CEO of Civil Bank, said that the central bank should be flexible in terms of provisioning requirement of bad loans in special circumstances. "We may have to restructure many loans floated in the housing and real estate sectors due to the inability of the borrowers to repay loans. We may have to provide grace period to them. However, the provisioning requirement of the central bank will make it difficult for the BFIs for restructuring of such loans," Maharjan said. "The central bank should be a bit lenient and change the provisioning policy allowing us to make less provisioning."

BFIs are required to make 100 percent provisioning of loans after three months if any borrower delays regular debt servicing.

According to existing policy, a commercial bank can float only 10 percent of its loans in the real estate sector. However, it can extend 15 percent of total credit on home loans.

Meanwhile, NRB has shifted some of its departments and offices to a Lainchaur-based building of Prabhu Bank Ltd after some offices of central bank's head office in Baluwatar and another office at Thapathali suffered heavy damages due to the quake.

source: republica,15 may 2015