KATHMANDU: Nepal Rastra Bank (NRB) has taken a move to protect the economy from a possible crash. NRB issued a directive today to control lending in the real estate sector to 25 per cent of the total investment.

Investment in real estate sector by banks and finance companies has started affecting liquidity since August. Around half a dozen Nepali banks and finance companies are lending up to 90 per cent in the sector.

Banks and financial institutions should reduce lending to 15 per cent within this fiscal year. Further, lending should be below 10 per cent of total lending in 2010-11. Banks and finance companies cannot invest above 25 per cent in real estate and above 40 per cent in combined real estate and housing.

NRB has ordered banks and finance comapnies not to invest above 60 per cent of the collateral. Banks’ investment in real estate has hiked the value of land unnaturally in recent years. NRB has taken the move to control investment in land because remittance is decreasing in recent months.

NRB has advised financial institutions to reduce the size of lending in real estate and home loan to 30 per cent in the current fiscal year and 25 per cent in the next fiscal year. Further, the directive has ordered them not to issue new loans which exceed the limits mentioned in the directives.

If the banks and finance companies fail to resize lending, NRB has advised them to increase loans weight to 150 per cent.

NRB has further tightened the lending process limiting the lending upto 80 per cent of deposit or capital. The central bank has set three deadlines to achieve the target. Banks and finance companies should reduce their investment to 95 per cent of the deposit within this fiscal year, 85 per cent at the end of fiscal year 2010-11 and 80 per cent at the end of 2011.

Reduction target in total investment

July 16, 2011 July 15, 2012

Real-estate loan 15 per cent 10 per cent

Real-estate and Home loan 30 per cent 25 per cent

Reduction target in over 80 per cent investment

July 16, 2010 July 16, 2011 January 14, 2012

95 per cent 85 per cent 80 per cent