The slowdown in the real estate and housing sector has doubled the number of blacklisted firms and individuals in the last two years.

Since the beginning of 2068 BS — mid-April 2011 — till date, some 629 firms and individuals have been blacklisted by Credit Information Bureau (CIB) for defaulting on loans. Among the existing blacklisted companies, there are 25 housing and land developing companies listed by CIB for not repaying loans.

As banks have tightened loan recovery from realtors, the number of defaulters has gone up in the last two years. In two years, between mid-April 2009 and mid-April 2011, only 382 firms and individuals were blacklisted.

Among the blacklisted borrowers in the period, only two business firms were in the realty business.“As the land business stopped yielding high returns like it did during its peak, those that have over leveraged for short-term gains on land have suffered the most,” said a housing developer.

Back during the real estate peak season between 2008 and 2010, lending by banks to the real estate sector grew exponentially. “During the time, it was profitable to borrow from banks at 12 per cent interest and sell the land at almost double the purchasing price within a week, but it was not supposed to last too long,” pointed out the developer.

Nepal Rastra Bank (NRB), fearing a systemic failure due to overexposure to the real estate sector, capped the lending to the sector in December 2009, which abruptly brought the sector to a standstill. NRB had directed banks and financial institutions to trim down the lending to real estate and housing to 40 per cent at the highest, of their total credit.

Some of the financial institutions’ credit to deposit ratio had even crossed 100 per cent as they were riding along with the borrowers on speculative land transactions.

Once the loans to real estate was capped, the difficulty in accessing cheap credit led to a contraction in the whole sector, increasing the number of defaults.

Not only real estate and housing companies, but companies being operated by realtors have also been blacklisted due to the inability of their promoters to pay the interest and principle. Other companies owned by Sudhir Basnet, promoter of a number of housing projects such as Oriental Apartments and Eastern Apartments, among others, have also failed as the cash flow stopped due to tightened realty lending.

Lending by commercial banks to realty has come down to about Rs 67 billion by the first quarter of the current fiscal year which was as high as Rs 97 billion two years back.

Moreover, after 2010-11, NRB allowed banks to recommend CIB to blacklist any defaulter irrespective of the loan size. Only defaulters of loans worth more than Rs 2.5 million needed to blacklisted at that time.

“Now more defaulters will be blacklisted as borrowers defaulting on loans as less as Rs one million will be blacklisted,” said NRB spokesperson Bhaskar Mani Gyanwali.

Being blacklisted makes the borrower –– any person or firm –– ineligible for acquiring or rescheduling any new loan from any financial institution –– not even credit card. Such blacklisted people cannot even become a guarantor for other loans. Moreover, such blacklisted people also become ineligible to hold the position of a director in any publicly listed company.

source: The Himalayan Times,9 Dec 2012