The Nepal Rastra Bank (NRB) is to adopt a lenient policy for investment on land under the realty sector. The monetary policy for this fiscal year is set to allow up to 25 percent of investment by banks and financial institutions in land loosening the previously strict provision of limiting it to just 10 percent. NRB sources claimed that loans for land and residence will not be differentiated in the 25 percent ceiling for real estate.

The central bank is planning to remove the 10 percent ceiling for land within the 25 percent ceiling for the realty sector but will not extend the deadline given to the banks and financial institutions to reduce the proportion of loan mobilized in the sector to 25 percent. The realty sector has been facing a slowdown for the past four years after NRB set a ceiling on investment in the sector. The banks and financial institutions have been stating that there are problems in recovering loans from the realtors while the realtors had also been urging NRB to extend the deadline to reduce the proportion of loans mobilized to the sector to 25 percent.

"There will not be a situation where the realtors are forced to sell at a low price if the 10 percent ceiling on previous loans is removed. The banks and financial institutions will also feel some relief from the pressure of the 10 percent ceiling," President of the Nepal Land and Housing Developers' Association Ichchha Raj Tamang said. The deadline given by NRB to the banks and financial institutions four years ago to reduce proportion of loans given to the realty sector to 25 percent expired at the end of the last fiscal year. NRB had directed to limit loans for land to 10 percent and that to residence to 15 percent out of that. The prevailing provision allows the banks and financial institutions to reduce the proportion of land to below 10 percent and increase that of residence to above 15 percent but not the other way around. But the new monetary policy that NRB is announcing will allow the banks and financial institutions to invest whatever proportion in land and residence within the limit of 25 percent for the realty sector.

NRB sources revealed that the central bank is adopting flexibility in older loans but will not apply the same yardstick on new loans. House of above Rs 10 million, personal overdraft of above Rs 5 million and land will be treated as real estate. The previous policy of NRB was strict about loans on land and proposed punishment against the banks and financial institutions not reducing the proportion of loans on land to 10 percent but the new one will exempt those reducing the proportion of loans on realty sector to 25 percent. The banks and financial institutions have estimated to have invested Rs 110 billion on the realty sector. It was Rs 87 billion in mid-May. Around Rs 10 million out of that was found to be under risk when the central bank conducted stress test of commercial banks recently.

Though NRB had adopted a lenient stance on housing and apartments following the demands of realtors to treat it as an industry it had adopted a tougher stance on land. NRB had fixed a 25 percent ceiling to reduce loan concentration on the sector four years ago fearing a bubble burst of the sector like that in America that triggered financial crisis. A few commercial banks had invested up to 40 percent in the sector before the ceiling was announced.

source: karobardaily.com,20 July 2013