To ease repayment of real estate loans amid stagnant realty prices, Nepal Rastra Bank (NRB) has allowed banks and financial institutions to renew 75 percent of their realty loans if the borrower pays 25 percent of the principal and interest.

As per the new NRB circular issued on Monday, banks can renew or restructure real estate loans for up to one year for one time.

An NRB official said that the move was taken to encourage people taking loans from banks for real estate purposes to repay them which would also help the liquidity situation of the banking system.

"Banks will also be able to make a good profit with the repayment and

people engaged in the real estate sector will also feel a sense of relief as they have been faced with stagnant real estate prices," the official said.

As the central bank has not been flexible regarding exposure to real estate loans, banks having higher exposure in the sector will have to labour hard to bring their credit issues within the limit. Banks have to bring down their real estate and housing loans combined to 40 percent by the end of the current fiscal year.

With the strict provision on realty lending, banks tightened lending in the sector leading to stagnation. The realty sector witnessed a sharp fall of 26 percent in the first 11 months of the current fiscal year in the Kathmandu Valley, according to the Department of Land Reform and Management.

Almost all banks witnessed a rise in provisioning in the third quarter of the current fiscal year against the second quarter which bankers say was, in part, a result of delays in repayment of property related loans.

Ichchha Raj Tamang, president of the Nepal Housing and Realty Development Association, said they were not much encouraged with the NRB move as it was a move to ease the renewal of loans alone. "Our demand was to increase the ceiling of realty loans to 50 percent from the current 40 percent for the next two years and decrease to 35 percent on the basis of 5 percent each year," he said.

President of the Nepal Bankers Association Sashin Joshi said that the NRB move would help to safe-land many vulnerable real estate loans.

Chief executive officer of DCBL Bank Sudhir Khatri said NRB's move was correct which would help the economy from the credit crunch. "It would have been even better if the relaxation was made for every year if 25 percent loan was repaid," he added.

source: Post  Report(2010),"Central bank softens rules on realty loans",28 June 2010