The government's delay to lift ban on construction of new houses across the country has affected bank and financial institutions (BFIs) who generate significant business from housing and real estate sector.

BFIs have not been able to extend new loans for residential homes and commercial housing as the government has stopped issuing construction permits for new buildings following the devastating earthquake of April 25 and subsequent aftershocks.

Though the government had said that it would stop issuing such permits until the end of 2014/15 to frame new building code and other necessary policies and regulations for building construction, it has yet to come up with such codes.

"Residential home and commercial housing loans comprise a significant portion of total loan portfolio of any BFIs. Any delay to lift the ban on issuing construction permit will affect the balance sheet of BFIs in the days to come," said Ashoke SJB Rana, CEO of Himalayan Bank Ltd (HBL).

Rana also said municipal offices are not issuing building completion certificate for completed homes. "The refusal of the local bodies to issue certificate for such homes will make it difficult for home owners to buy insurance policies," he added.

According to a provision of Nepal Rastra Bank (NRB), BFIs can extend real estate and housing loans worth up to 25 percent of their total lending apart from residential home loan whereby BFIs can lend up to Rs 10 million for individual residential home loan.

Realizing brisk business prospect in residential home lending, most of the BFIs have launched specific home loan products. Banks like Sunrise Bank Ltd, HBL, Prabhu Bank Ltd and Sanima Bank Ltd, among others, have separate home loan products for borrowers.

Ashok Sherchan, CEO of Prabhu Bank Ltd, also warned that the delay in lifting ban and introduction of new building codes may hit profit of BFIs. "Most of the BFIs have exposure of at least 10 percent of their lending in residential home loans or real estate and commercial housing. While there may not be major impact in the short-term, any slowdown in the housing or home loans can affect balance sheet or profit of BFIs," said Sherchan.

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 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.

Though NRB has imposed a cap on lending for real estate and commercial housing to 25 percent of total loans, this sector along with individual residential home loan has become one of the major portfolios of lending for BFIs who are lately grappled by liquidity surplus in the absence of new investment avenues.

The banking industry has liquidity surplus of around Rs 39 billion even after NRB mopping up loan-able cash of around Rs 80 billion in recent months through various instruments.

"More borrowers would have been interested to borrow loans at a time when interest rates are plunging due to excess liquidity. BFIs would have also been making business through home and housing loans. However, the slowdown in the demand for such loans due to the devastating earthquake and the government's decision to stop issuing construction permit will hit banks' profit," said another CEO of a commercial bank, requesting anonymity.

Banks' interest rate for individual residential home ranges from 8 to 15 percent.

QUAKE VICTIMS NOT GETTING HOME LOAN AT 2% INTEREST
Meanwhile, the earthquake-hit families are yet to get subsidized loans to rebuild their homes destroyed by the recent earthquake as banks have not been able to issue loans because of the ban on construction of new buildings.

Immediately after the earthquake, Nepal Rastra Bank (NRB) had announced that it will provide 0 percent refinance facility for BFIs to offer concessional loans (with 2 percent interest) to earthquake survivors to rebuild their homes.

BFIs are allowed to lend a maximum of Rs 2.5 million to quake-hit families inside the Kathmandu Valley and Rs 1.5 million for those living outside the valley.

"The working procedure to float such loans says that the borrower should adhere to national building code which is under the review of the government. Likewise, VDC and municipalities have stopped issuing construction permit. BFIs cannot float loans without these documents. So the loans have not been floated as per this facility," Krishna Raj Lamichhane, president of Development Bankers Association of Nepal, told Republica.

More than 600,000 homes were fully or partially destroyed by the recent earthquake and subsequent aftershocks, according to Post-Disaster Needs Assessment prepared by National Planning Commission.

Source: Republica, 30 july 2015