Real estate rate may cause banking to abate

Nepal is over-banked and agressive lending as well as large exposure of the financial sector to real estate could harm the financial health of the country, warned a visiting International Monetary Fund (IMF) team.
"With some 160 licenced deposit-taking institutions, Nepal is over-banked," said Braian J Aitken, Deputy Division Chief of Asia and Pacific department of IMF.
"Aggressive lending practices of many of the financial institutions expose their depositors to excessive risk. This underscores the urgency of significantly ramping up Nepal Rastra Bank's (NRB) regulatory enforcement," IMF team leader Aitken said adding that the central bank might find it difficult to supervise the increasing number of financial institutions. "Thus, the central bank's supervisory capacity has to be increased," he added.
IMF has also shown serious concern over the rapidly growing real estate price. "The biggest short-run concern is rapidly growing real estate price. Given the large exposure of the financial sector to real estate, a decline in real estate prices would have negative effects on banks and ultimately on output growth," said the IMF team.
The IMF blames the loose monetary policy for this development in the real estate market. "Development in the real estate market has been fuelled in part by a loose monetary policy," IMF said. "However, NRB recognises the risks and has recently taken some modest steps to tighten monetary policy but more tightening may be needed."
The central bank has announced a cautious Monetary Policy - that was a regular Seventh Policy - for the fiscal year 2008-09 on September 29. NRB has claimed that it has brought a rigid Monetary Policy that has increased the cash reserve ratio (CRR) by half a percentage point to 5.5 per cent. The CRR has been five per cent since 2004.
The IMF team's visit is focused on the recently approved budget and current financial and macro-economic conditions. The team held marathon discussions with Finance Minister Dr Baburam Bhattarai, finance ministry officials and the acting governor of the central bank over the last two weeks. "Nepal's macro-economic situation is good but subject to risks. Its outlook broadly remains stable, but the average inflation could increase to around 11 per cent," according to IMF.
This year's Monetary Policy has also been designed largely to maintain macro-economic stability and price rise control. But it has not been able to crack the whip on rising inflation. "Inflation in Nepal is largely catalysed by conditions in India," said Aitken, adding that Nepal's inflation could well be called imported.
The IMF also termed the recently approved budget as ambitious. "Revenue is budgeted to increase by 1.75 per cent of the GDP in part based on improved tax administration," the IMF team said. "Higher revenue forecast accomodates a sizable rise in budgeted recurrent spending. The government has taken impressive steps in an effort to achieve its revenue target. Revenue remains buoyant at this stage, but there is still the risk that if planned revenue fails to materialise the sustainability of the budget could be threatened," summed the IMF team that visits Nepal twice a year to access the country's fiscal and monetary policies.