Liquidity crisis hits real estate hard


In the first quarter of the current fiscal 2017, hard times have hit the house, land and real estate businesses in Kathmandu Valley.

Decrease in the flow of loans by commercial banks has pushed investors away from real estate business. To a large extent, the liquidity crisis has had various adverse effects on the real estate sector — one being the absence of major commercial property investment activity. Reportedly, most industrialists and businesses had to return without receiving credit from the banks.

Real estate entrepreneurs claimed that the liquidity crunch affected sales of houses and lands for lack of loan approvals. Real estate entrepreneur Gopal Rai said that the transaction of houses/lands has decreased by 40 per cent in the last two to three months.

He said, “If one has a capital of Rs 1 crore but his cost of building a new house is Rs 2 crores, he has to seek a loan amount from the bank. However, at present banks are not easily giving loans to customers due to the liquidity crunch.”

Another real estate entrepreneur Subash Ghimire said that overall sales transaction of real estate properties has slowed down and entrepreneurs are turning to rental business to sustain in the market.

In financial economics, a liquidity crisis refers to an acute shortage or drying up of liquidity. Liquidity is a catch-all term that may refer by market liquidity (the ease with which an asset can be converted into a liquid medium, for example, cash), funding liquidity (the ease with which borrowers can obtain external funding). This shortage of liquidity reflects a fall in asset prices below their long run fundamental price, deterioration in external financing conditions, reduction in the number of market participants, or simply difficulty in trading assets.

Impact on revenue collection

According to the Department of Land Reform and Management, before January 2017, custom registration was increasing doubly but this trend has been slowing down since February.

The impact of the recession in business is shown in the revenue collection of land revenue offices. Kathmandu’s largest revenue collecting office in Dilli Bazaar show dismal figures. In February, the revenue collection decreased by 40 per cent and stayed at Rs 11.41 crores.

There are eight land revenue offices inside the Valley. The monthly revenue collection of all the land revenue offices has decreased rapidly. Since December 2016, the revenue collections of all the offices reduced by 40 per cent on average. In December, seven land revenue offices had collected Rs 103 crores as custom registration.

However, in the January it went down to Rs 69.86 crores.

Bhaktapur land revenue office shows that revenue collection for January is Rs 12.93 crores and that of February is Rs 10.62 crores. Similary, January’s revenue collection of Lalitpur land revenue office is Rs 14.94 crores which decreased in February to Rs 11.98.

The government effort

The existing real estate business is currently not in a state to even think of expansion of its businesses. The fluctuations shown in the interest rates in the past months have discouraged investors.

In order to address the liquidity crunch in the financial system, Nepal Rastra Bank (NRB) — the central regulatory and monetary authority — has brought about changes in the method to calculate the credit to core capital cum deposit (CCD) ratio in the revised Monetary Policy of the current fiscal.

The NRB presented some relief to commercial banks in CCD calculation. As per the provision, banks can deduct 50 per cent of their total exposure to the productive sector in CCD calculation at the end of this fiscal.

Spokesperson of NRB, Narayan Paudel, claimed that in the coming months there would be no more scarcity of liquidity in the banks as NRB has already taken matters in its own hands to solve the liquidity crunch in the market.

The CCD ratio is calculated by dividing loans disbursed in local currency by the sum of local currency deposit and core capital — also known as tier one capital, which includes equity capital and portion of net income retained by institutions. This outcome is then multiplied by 100 and it should not exceed 80. As per the revised provision, banks, however, can now deduct 50 per cent of the loan amount disbursed to the productive sector from the total disbursed loan.