NRB cap won't have much impact on banks

KATHMANDU, Dec 19: Nepal Rastra Bank´s capping of banking sector lending is the realty sector is unlikely to have much impact in the short term since the loan exposure of most banks to the sector is far less than the set limit. [break]



According to NRB figures, only two banks out of the 27 commercial banks in operation have crossed the 40 percent loan exposure limit imposed by the central bank, while most of the large commercial banks have much lower loan exposure to the realty sector. This means they can and will still invest in the sector.



Kist Bank and Development Credit Bank have loan exposures to the realty sector of 48.2 percent and 45.6 percent respectively as of mid-October, 2009. As per the NRB directive both banks are barred from making any new investment in the sector.



Chief Executive Officer at Kist Bank, Kamal Gyawali, told myrepublica.com that the bank has stopped issuing fresh loans in the realty sector and geared up efforts to bring its exposure down below 40 percent.



"We will pump out more loans into other sectors like business and enterprises to right-size our investment portfolio," he said and expressed confidence the bank will face no problem in achieving the target because of its huge capital base.



Besides, we have called on real estate borrowers to pay back 10-20 percent of the loans, and this will help us further lower exposure to the sector, Gyawali said.



NRB on Thursday imposed a cap on the loan exposure of financial institutions to the realty sector (housing and real estate) at 40 percent of their total investment portfolio by the end of the current fiscal year and at 25 percent by the end of fiscal year 2012/13.



Many commercial banks may, however, find it difficult to limit their realty sector loan exposure to 25 percent in the next three years if they fail to alter current investment patterns.



Bank of Asia, Citizen Bank, Prime Bank, Laxmi Bank, Sunrise Bank, NIC Bank, Machhapuchhre Bank, Global Bank and Standard Chartered have exposures of over 25 percent.



Lumbini Bank, Agriculture Development Bank and Himalayan Bank have the least exposure to realty.



Meanwhile, a day after imposing the cap, the central bank clarified that financial institutions are allowed to issue loans that have already been committed even if their exposure exceeds the set limit.



"But financial institutions with over 40 percent exposure will be allowed to neither issue fresh loans nor renew or reschedule old ones," said Laxmi Prapanna Niraula, NRB Director.



Niraula further informed that directives on additional provisioning for loans exceeding the cap would come into effect once the deadline for limiting loan exposure to 25 percent expires.



Banks cannot force the clients to review repayment period.



Niraula also informed that NRB has also instructed financial institutions that they cannot force their clients to shorten their repayment period to comply with the exposure limit. "What (duration of payment) has been already agreed in the contract must prevail. Banks cannot force the clients to repay earlier," said he.



Since the banks cannot force their clients for early repayment the only option they have ( with realty sector loan exposure above the limit) increase their loans in other sector.



"If the liquidity crunch continues along the current trend, it will be very difficult for financial institutions to make further investments in other sectors to bring down the share of their realty sector laon," said Radhesh Pant, former president of Nepal Bankers Association (NBA).

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