Commercial banks credit flow in real estate dropped by around one billion rupees over the last six months, as banks tightened issuance of fresh loans and focused more on recovery after Nepal Rastra Bank (NRB) in January imposed cap on their loans exposure in the sector.

The banks lending in the housing sector also slowed substantially during the period, as the cap forced banks to tighten lending in residential constructions as well.


The loans of commercial banks in the real estates dropped to Rs 37.96 billion as of mid-July 2010, whereas it had already exceeded Rs 38.94 billion in mid-January 2010, shows data released by the central bank. “This is a straight drop of Rs 980 million in loans flown in the sector in just six months,” says the report.

Commercial banks had issued well over 14 billion rupees in the real estate business in the first six months of 2009/10, ending mid-January 2010, when transactions of land has soared sharply, further sparking unnatural rise in the prices of property.

Likewise, the statistics show that the commercial banks issued just around 670 million rupees in fresh loans in the housing sector following the central bank?s intervention. The figure was mere one-third of what they doled out during the span of the first six months of 2009/10.

NRB statistics show, banks loans for residential construction totaled to Rs 37.51 billion as of mid-July 2010. The figure was Rs 36.84 billion in mid-July, 2010.
Squeezed loan flow and also the rise in lending rates that culminated in the wake of liquidity crunch caused transactions of land and housing to drop significantly in the major cities, including the Kathmandu Valley.

Reports of Department of Land Reforms and Management say the directives mainly check realty transactions done for reselling purpose, one of the reasons behind unnatural rise in prices, and thus, forced the market to take a corrective course.

Prior to the intervention, realty prices in the Kathmandu Valley had doubled every six months over the last two years on the back of growing demand for property. Rise in income, procurement of property with a motive of profit taking, migration by choice resulting from soaring remittances, forced migration and transfer of property sparked by Tarai movement and deteriorating law and order situation in other parts of the country had fuelled the demand.

While easy bank finances contributed to build the buying pressure, the banks were funneling massive loans in the sector.

As a result, bank loans in real estate had fast touched Rs 10.73 billion in mid-July 2008 and jumped to Rs 24.76 billion in mid-July 2009 and Rs 38.94 as of mid-January 2010.

source: republica(2010),"Realty lending drops ",republica, 10 September 2010, p.5