The new monetary policy (MP) to be announced on Wednesday will bring cheer to housing developers and banks as it will relax the capping on housing loans of commercial banks.

According to a central bank source, it will allow banks and financial institutions (BFIs) to lend 25 percent to the housing sector and 15 percent to real estate, reversing the existing lending cap for housing and real estate.

However, the total loan exposure in real estate and housing should not cross over 40 percent. With these provisions, the threshold of housing loan will go up while the threshold of real estate loan will decline.

As per Nepal Rastra Bank (NRB)’s directives on December 2009, the BFIs were supposed to downsize their exposure to real estate and housing to 30 percent by the end of this fiscal. The change in the capping of housing loans comes amid complains from BFIs and housing developers.

In a bid to bring on track the overheated realty market, NRB had tightened the BFIs’ lending to these sectors last December, instructing them to limit their loan exposure to real estate to 25 percent of their total loan portfolio. As of now, the total exposure of banks in housing and real estate is Rs 98 billion which is 21.07 percent of the total lending of the banks that stands at Rs 465 billion.

The new policy will not have major policy-level changes, according to NRB sources. Amid growing trade deficit and balance of payment (BoP) deficit, the central bank will introduce some policies to substitute imports and provide some facilities to sectors with export potential. According to NRB sources, the policy will have a provision that will allow Nepali industries that help import substitution to get loans from foreign financial institutions. Likewise, list of goods that can be imported from India by paying in US dollars instead of IC will be increased.

The central bank will increase the bank rate to 7 percent from the existing 6.5. It will, however increase the capital cost of commercial banks and encourage them to increase interest rates.

The new policy will give flexibility to the banks on lending, encouraging them to go for lending in productive sectors.

There will be no changes in the Cash Reserve Ratio (CRR) as the liquidity position of the banking system has improved of late. However, the CRR will be counted under the Statutory Liquid Ratio (SLR) that was reintroduced in the last monetary policy to ensure greater financial stability.

There also won’t be any relaxation in the income source disclosure in bank deposits of over Rs 1 million. Bankers had suggested that instead of the income source, depositors be allowed to declare that the money had not been earned from illegal activities.

Even though inflation is hovering at around 10 percent, the new policy targets to keep it at 7 percent. It has projected that the domestic credit will grow by 16 percent in 2010/11.

Promoting merger of banks is one of the priorities of the upcoming monetary policy. The central bank will come up with a flexible approach on capital adequacy, networth and non-performing assets (NPA) of the banks after its merger, according to NRB sources.

source: Kathmandu Post (2010),"Policy to be boon for housing sector",The Kathmandu Post, 27 July 2010