Development banks and finance companies have realty loan exposure of 30 percent compared to 20 percent of commercial banks.

Total lending of development banks (‘B’ class FIs) and finance companies (‘C’ class FIs) to the realty sector stands at around Rs 37 billion, according to the Nepal Rastra Bank (NRB). While finance companies have lent Rs 24 billion in the sector, development banks’ lending stands at Rs 13 billion. Commercial banks have provided loans worth around Rs 100 billion in the sector. There are 83 development banks and 79 finance companies in the country. However, not all have made uncontrolled lending. FIs from Kathmandu and Chitwan have made huge lending in the sector, according to a senior NRB official. “Those making uncontrolled lending will have to struggle to reduce their realty loan exposure,” said the official.

The central bank has directed BFIs to reduce their exposure to the realty sector, including home, apartment, commercial complex and land, to 30 percent by mid-July 2011. They should bring down the size to 25 percent by mid-July 2012.

“As only a few national level development banks have huge investments in the sector, it will not create a big problem,” said Jhapat Bohora, president of Development Bankers’ Association. “The situation can be handled.”

Bohora added that many FIs have adopted ‘wait and watch strategy’. “Entire economy will receive severe blow if realty sector recession continues,” he said.

Finance Companies’ Association of Nepal President Ram Shanta Shrestha said they have stopped lending in the sector and are focusing on loan recovery.

Realty traders say they are not even being able to pay bank interest due to the recession in the sector. They are finding it hard to sell land. “How can we repay loans without selling land?” asked an official of Housing Developers’ Association.

Although deposits in ‘B’ and ‘C’ class financial institutions had increased last year, their deposit collection is not so

encouraging this year. During the first quarter of the current fiscal year, deposit growth of development banks and finance companies stood at 4.1 percent and 4.2 percent, respectively. The rate was 52 percent and 24 percent, respectively, last year, according  to NRB.

Although the central bank is yet to receive financial details of the second quarter, the NRB official said prospects are not so encouraging.

source:The Kathmandu Post(2011),"Class B, C Fls clever in realty lending", The Kathmandu Post, 27 feb 2011