As the land prices slide and transactions slow, borrowers are beginning to default on their loan payment, sending ripples across the financial sector. “Some of the banks have started reporting cases whereby land and housing developers have defaulted on loans,” said a member of Nepal Bankers´ Association. Defaults have been reported not just in case of real estate dealers, but even in cases of developers who had claimed that all their apartments had been booked. These developers, according to the bankers, have claimed that the buyers are canceling bookings even after paying 10 percent cash in advance. As a result, many developers have approached the banks for rescheduling of their loans. “Some of them even approached us requesting refinancing for their past loans,” said a banker. These are just early signs of trouble for the realty and housing sector, as they are for the banking sector, and we will have to wait for a few more months to see how this plays out in the overall financial sector, he said. “Banks and financial institutions whose loans exposure to realty is high and loans are sub-prime will be definitely hit hard,” said Sudhir Khatri, chief executive of DCBL Bank. According to Nepal Rastra Bank (NRB), some half a dozen banks have high exposure to real estate -- much above its prescription of 10 percent. The slump in prices and transactions, if continued, as is likely, for some more time, could raise default rates and blot their non-performing assets and non-banking assets, hitting their overall financial health. Currently banks and financial institutions have invested Rs 85 billion in real estate and housing sectors. Some 50 percent of that, which is well over Rs 40 billion, is issued in real estate (mainly land purchase) alone. “Worse, a great majority of those real estate loans are sub-prime,” said an NRB official. When the asset bubble spurred over the last three years, prices of land more than tripled in many parts of the country. And a large number of banks and finance companies have issued loans as high as 80 percent of the unnaturally inflated prices. “What makes all this more serious is most of such lending is backed by the property (mainly land and house) itself. No doubt, the price slide will create double jeopardy,” said the NRB source. But the bad news doesn´t end here. The drop in realty prices could even trouble bank with manageable loans exposure in the sector, because more than half of total credits are generally backed by land and buildings. NRB´s data of mid-October 2010 show, Rs 281.19 billion worth of total Rs 482.83 billion loans of banks is backed by land and buildings as collateral. “If prices slide further, bankers will have to knock on doors of other clients as well for additional collateral to safeguard their loans,” said the source. NBA President Sashin Joshi, however, argues that realty loans exposure of the banks is already in the path of correction. “It will be too early to predict the scale of the problem,” he said. Other bankers are more worried. Said another NBA official, the real estate crash will severely dislocate at least a couple of players. “It will not allow other players to rest in peace as well,” the official said. Some 20 of 83 development banks, which hold some Rs 80 billion in people´s deposits, too have issued credit in the sector generously. The situation is still worse in case of finance companies. NRB records show that some of the finance companies´ exposure to the royalty sector is as high as 80 percent. And even the cumulative exposure of all companies in the sector stands above 50 percent. “This is worrying situation,” said the NRB official. Jhapat Bohora, the president of Nepal Development Bankers Association, however, said that development banks´ exposure to the sector values just at around Rs 4 billion. “This will not have much effect to the industry,” he said. ´Drop anticipated, no problem´ Senior economist Professor Dr Bishwambher Pyakuryal, who is also the board member of Nepal Rastra Bank, meanwhile, said that the latest drop in prices was well anticipated by the central bank. “It might hit a few finance companies -- an area where the central bank has weak supervisory presence. But it will not have systemic impact,” he told Republica. But he conceded problems in a large number of finance companies could complicate situation for the central bank. The real estate dealers that long resisted the selling pressure, fearing downward price spiral, have started to cut prices in a bid to lure buyers and recoup all possible investment at earliest. This has caused the prices of property to drop in range of 20 to 30 percent on the outskirts of Kathmandu, 15-25 percent in Lalitpur and 10-25 percent in Bhaktapur.
source:republica