In a bid to bring down their realty loan exposure to the level prescribed by the central bank, banks have started to press realty traders to sell land and repay loans at the earliest.

The monetary policy has provisioned that banks and financial institutions (BFIs) should reduce their loan exposure to realty to 10 percent and housing to 25 percent this year.

Although banks have made long-term lending to the real estate sector, they are exerting pressure on borrowers to sell land for early repayment. This move has helped them reduce the size of lending in the sector to some extent. Bankers, however, prefer to use the word ‘suggestion’ instead of ‘pressure’. “Possibilities of downturn in realty price are high as long as land remains unsold,” said a chief executive officer of a commercial bank. “We are suggesting them to sell land as they are even struggling to pay interest.”

Banks had made lending up to 80 percent of the market price during the heydays of realty business. “There is a risk that traders may not even get their cost price,” said Ajay Shrestha, chief executive officer of Bank of Kathmandu. “That is why we are suggesting them to sell their land and repay loans.”

Shrestha said traders may not be able hold land for a long time as they also have to pay interest to banks. “It is better to sell land and repay loans before price downturn begins,” he said.

Commercial banks have invested more than Rs 100 billion in the realty sector as of the second quarter of the current fiscal year. The figure is around 20 percent of the total lending. Banks’ loan and advance stands at Rs 502 billion. A big chunk of lending is in land.

Realty traders also admit that banks are worried about risks associated with the downturn in real estate prices. “Banks will be affected if the real estate market does not improve,” said Bhesh Raj Lohani, secretary of Nepal Land and Housing Developers’ Association. “It is natural for them to worry and take measures to ensure early repayment.”

Some traders said banks are pressing them to repay loans by selling land or repay 25 percent of the loans immediately. Major realty lenders—Kist, Machhapuchhre and DCBL banks—have brought down their total loan exposure by Rs 1 billion during the second quarter of the current fiscal year compared to the same period last year.

New banks and banks having insignificant loan exposure to realty have, however, increased their lending to the sector. Global, Janata, Laxmi, Lumbini, Mega, Nepal Bank, NIC, NMB and SBI are some banks that have increased their lending to the sector over the period. Commerze and Trust Bank, however, has not made any lending to the sector, according to its financial report of the second quarter.

Of late, both non-performing loans (NPL) and provisioning of banks have grown with the delay in repayment of realty loans. Both bankers and realty traders are saying that the central bank should be more flexible on lending in the sector. “There are no risks in home loans as house is the basic need of people,” said an official of Nepal Bankers’ Association. “We have asked the central bank to be more flexible on home loans.”

Lohani also said that they have a similar request to the central bank. With the slowdown in realty trading, there has been a significant drop in revenue collection from the sector. Revenue collection from the sector used to be higher than targeted until the last fiscal year. This year, the situation is just opposite. During the first six months, five land revenue offices of the Kathmandu Valley have collected Rs 1.54 billion, whereas the target stands at Rs 3 billion.

source:Shrestha, Prithvi, Man(2011),"Banks put payback squeeze on realtors", The Kathmandu Post:Money, 24 feb 2011, page.1