A year after the central bank tightened screw to cool down the real estate bubble, it decides to ease restrictions on housing – amid scares of mass default on bank loans<br>SANJAYA DHAKAL

March 13, 2011, 5:45 p.m. Published in Magazine Issue: Vol. : 04 No.- 18 Mar.11-2011 (Falgun 27,2067)<BR>

Governor Dr. Yubaraj Khatiwada started his mid-term review speech on monetary policy last week with reassurances that he was not in a mood for any policy shift.

The bankers sitting around the table at the central bank hall exchanged anxious glances at his remarks.

But towards the end his words brought smiles to most of the bankers.

The governor had made a small but significant policy departure.

“The housing sector will be considered as productive sector. Housing is also a basic human need. Therefore, new guidelines will be prepared to ease credit flow to housing,” he said.

The governor announced that the central bank will soon prepare the new guideline for the purpose.

Although he did not ease any restriction on real estate sector on the whole, the housing policy was also a remarkable pressure-releaser for the bankers.

Huge Concentration
The data of the Nepal Rastra Bank (NRB) show that as much as Rs 135 billion have been invested by the banks and the financial institutions on real estate and housing sector.

The earlier NRB policy imposing cap on the credit to real estate – 30 percent in this fiscal year and 25 percent in the next year – had cooled the overheated sector.

But in recent times, the danger was building on chances of mass default of bank loans.

The real estate operators had warned that their transactions had come down by almost 90 percent in recent months.

The loan they took promising handsome interest rate to the banks and financial institutions at the time when there was a great real estate rush, were now becoming a real risk for the banks.

The bankers had already started murmuring that they needed some kind of leeway.

After last week’s announcement, it seems, they are a bit relaxed.

“The policy on home loans announced by the governor is positive. We only hope that they would be implemented within this quarter,” said Ashok Rana, president of Nepal Bankers’ Association.

Merge, Merge, Merge
One of the recurring themes of governor Khatiwada’s policy speech was his focus on the need to initiate merger among the banks and financial institutions.

As the credit interest skyrockets propelled by increasing rates of interest on deposits, banks are worried about the cost of fund.

The governor presented merger as its answer.

“The banks must go for operational efficiency at this moment. Mergers can be a good answer. It will bring down the costs of operations – one CEO will be enough instead of two or more; one management unit will be enough and so on. Therefore, I have been urging you to go for merger,” he said.

He said that merger-induced efficiency could help banks reduce the gap between credit and deposit interest rates.

The mid-term review continued the freeze on new applications for opening new commercial banks and extended it to cover other kinds of banks.

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