Central bank breather for banks, real estate, housing and loan against shares

Central bank today provided much needed breather to banks and financial institutions by relaxing residential housing and real estate loan, and loan against shares to give a breather to the cash-strapped banks and financial institutions.
"If a borrower pays all the outstanding interests, one can renew real estate loan for a year, said central bank spokesperson Bhaskar Mani Gyawali.
Similarly, the personal home loan limit has also been increased to Rs 8 million from current Rs 6 million.
The financial institutions have lent around Rs 6 billion against shares and Rs 99 billion to real estate and Rs 38 billion to housing sector.
Earlier in March, the central bank had created a separate category for the residential home loans of up to Rs 6 million as residential home loans that would not be dealt as the part of real estate and housing loans to encourage first home buyers and give some relief to the banks and financial institutions.
However, bankers said that it will only post pone the problem.
"The borrowers will be encouraged to pay interest but other economic indicators must also support," said CEO of NMB Bank Upendra Poudel.
The renewal provision is expected to give the banks and financial institutions' a chance to clean their balance sheet and give boost to their profits as the stagnation in ballooning real estate prices has freezed their loan recovery limiting their lending capacity.
The central bank’s breather will definitely benefit financial institutions and construction sector too, that both were under pressure.
As the financial institutions real estate and housing portfolios swelled dangerously posing a high concentration risk the central bank had caped their flow credit to 25 per cent of the total lending fearing over flow on unproductive sector could lead to systemic risk in financial institutions.
As a result the real estate, rent and professional service sector that has posted 3.6 per cent growth in the fiscal year 2009-10 is expected to grow by only 2.6 per cent this year, according to the Economic Survey.
The sector has recorded an average of 6.1 per cent growth in the last five years and its contribution to gross domestic product (GDP) stood at 8.2 per cent.
The freezing prices of real estate and housing has tightened the banks and financial institutions’ liquidity situation and they started struggling for loan recovery.
"The central bank has provided respite to the real estate and housing sector that will eventually help the banks and financial institutions,” he said.
Similarly, the central bank today completely relaxed loan against share. Earlier, one could get only 60 per cent loan of the share value. "But not the financial institutions will use their intelligent judgment while lending against share as they are free to lend, Gyawali said, hoping that it will boost the secondary market that has been performing poorly recently.
Ever since the central bank lowered the loan of 80 per cent to 60 per cent against share due to overheating of share market, it had been looking down.
The real estate and housing entrepreneurs, share investors and bankers have been lobbying to relax central bank cap recently.