Banks not to issue new credit to automobiles, real estate

Published On: February 10, 2017 12:20 AM NPT By: Republica  | @RepublicaNepal

KATHMANDU, Feb 10: Commercial banks have decided not to issue new loans to finance unproductive sectors including automobiles and real estate. 

They have also agreed among themselves not to issue margin loan that lets one to borrow by pledging shares as security.

Nepal Bankers' Association (NBA) made the announcement on Thursday, a day after Nepal Rastra Bank (NRB) Governor Chiranjibi Nepal cautioned them to maintain self-regulation or face the music. The governor on Wednesday asked the bankers to either regulate the flow of money in 'unproductive' sectors -- that has created credit crunch from supply side in banking system - or face punishment.

A meeting of the NBA, held on Thursday morning, took stock of the current situation and agreed to follow the regulator's advice. 

The freeze in lending, especially auto loan, housing loan and margin type loan, could hit these sectors hard as trading of these sectors is fuelled by bank financing. Nepal Stock Exchange (Nepse) index, for example, fell below the 1,300-point mark on Thursday due to the banks' decision to freeze margin lending, whereas the auto dealers and housing sector -- that has been slowing picking up after the devastating earthquake of last year - is likely to feel the heat. 

On Wednesday, Governor Nepal had told bankers that they were financing up to 90 percent of the cost in auto loans which could have adverse effect on economy. 

The central bank has also hinted at putting a cap on automobile lending in the same way it had done in the housing sector a couple of years ago.

In recent years, banks and financial institutions, which are financial intermediaries, have been posting huge profit, while manufacturing and productive sectors like agriculture have not been posting any growth. "The excess lending on unproductive sector could hit the economy hard," the governor had told the bankers during his meeting at the central bank on Wednesday.

Meanwhile, the finance ministry took stock of the situation on Thursday morning. At a meeting chaired by Deputy Prime Minister and Minister for Finance Krishna Bahadur Mahara, Governor Nepal briefed Mahara about his meeting with the bankers, while Finance Secretary Shanta Raj Subedi and Revenue Secretary Rajan Khanal briefed Mahara about the current situation of revenue and government expenditure.

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