Thursday, April 16, 2015

Private Sector and Post-war Recovery: The Case of Housing Bubble in Nepal

[This personal note follows the discourse in a previous post (Post-war Reconstruction in Nepal).]

When the US economy was in severe crisis due to realestate bubble, the banks in Nepal were pouring floods of money to private sector to invest in the same sector (Sapkota, 2011). Banks, along with the private investors, were very much hopeful of prompt returns from their investment because of the recently concluded civil war and coincidental boom in land and property transaction. Few years after some of the investors accumulated handsome profits, the central bank of Nepal imposed strict restrictions on loans to real estate business citing that the banks are investing huge sum of money in unproductive sector such as land and housing construction (Economic Analysis DivisionNepal Rastra Bank, 2011).
High-rise buildings in Gold Coast, Australia.
Like other developing countries, post-war Nepal sees
surge of such buildings which have been
symbol of high-standard living for
upper-middle class. Photo: Safal Ghimire
During this boom in investment in housing sector, commercial banks were estimated to have pumped in about USD 1 billion in realty market and have changed a considerable number of agricultural lands into concrete buildings. After the regulation from the central bank not to allow more loans to this sector, many private investors failed to payback instalments and most of the credit to realty market turned into non-performing loans (NPL) (Sharma, 2012). In this way, the already constructed highrise apartments impacted agricultural sector on one hand and on the other the sudden boom and bursting of this bubble created liquidity crunch in the already ailing post-war economy.

Effects on banking and finance
Due to the easily available credits from bank and financial institutions (BFIs), housing sector enjoyed unprecedented growth after 2006. Finally, the bubble of growth burst after the central bank, fearing excessive risk of investments in unproductive sector, directed them to bring down their exposure to realty sector to 25 percent from about 30 percent of total loan portfolio. It also restricted personal home loan at around USD 90,000 (Economic Analysis DivisionNepal Rastra Bank, 2011; Sapkota, 2012). Within three months, half a dozen BFIs (including Gorkha Development Bank, Samjhana Finance, Nepal Share Market, People’s Finance and Vibor Bank) became troubled one after another. Dhakal (2011) argues that the collapse of the housing bubble was seemingly pulling them down.


The BFIs were more than flexible in providing loans to the housing construction activities that could have helped them earn quick returns. Easy loan systems by private banks created economic imbalance. The supply of the highrise apartments was more than the demand in the market. Then the price plummeted and investors could not pay back principal to BFIs on time. It forced BFIs to increase lending rates, but this alteration in policy made difficult for investors to borrow loans and also forced potential purchasers of highrise apartments to think about other alternatives. Finally, BFIs put up around 1000 units of real estate properties for auction in the end of 2011.

Property prices were falling and no private company was willing to sell the apartments off at loss. Empty and unsold highrise buildings changed into 'ghost apartments' overnight. Some BFIs suffered from liquidity crisis, some others from bad corporate governance (Sapkota, 2011; Ghimire and Upreti, 2012). The BFIs witnessed an ultimate nightmare because over USD 1 billion of their investments were locked up in real estate sector.

The pouring of credits to the housing developers badly affected commercial banks themselves after the downturn. An analysis shows that the average level of bad debts (nonperforming loans) had risen by over 20 per cent in the first six months of the fiscal year. Sharma (2012) analyses the unaudited financial reports of 19 commercial banks, which shows that nonperforming loans of the 'A' grade banks has risen to an average of 3.45 percent of their total loan portfolio in the six months to midJanuary 2012 from 2.86 percent in the similar period a year ago. For instance, a giant bank, Nepal Investment Bank Limited, witnessed a steady rise in bad debts where its nonperforming loans rose from 0.62 percent to 2.11 percent of the credit portfolio in mid-January 2012. A Relations Officer at Nepal Investment Bank confessed to this author in a personal note that the banks in Nepal were in hard time because of the difficulties in recovering loans provided to housing construction.[1] Nabil Bank, Nepal´s largest private sector bank in terms of asset, for instance, reported 81.96 percent rise in bad debts, which share 3.33 percent of its total loan (Ibid). Officials from Nabil agree that almost 90 percent of the bad debt was there because of the faulty loans to construction sector.[2] Himalayan Bank and Standard Chartered Bank Nepal were also on the same boat with many other financial institutions.

References

Dhakal, S. (2011, July 1). Banking on Real Estate in Nepal. Spotlight. Kathmandu. Retrieved from http://www.mediaforfreedom.com/readarticle.php?AID=17387
Economic Analysis DivisionNepal Rastra Bank. (2011). Real Estate Financing in Nepal: A Case Study of Kathmandu Valley. Kathmandu: Research Department/Economic Analysis Division of Nepal Rastra Bank.
Ghimire, S., & Upreti, B. R. (2012). Corporate Engagement for Conflict Transformation: Conceptualising the BusinessPeace Interface. Journal of Conflict Transformation and Security, 2(1), 77100.
Sapkota, C. (2011). Nepalese Banking Crisis Explained. Journal of Institute of Chartered Accountants of Nepal, 13(4), 1620.
Sapkota, C. (2012, January 25). Real estate, housing and banking crises postponed in Nepal. Republica, p. 6. Kathmandu.
Sharma, R. D. (2012, February 14). Banks report rise in bad loans, drop in profit. Republica, p. 8. Kathmandu.




[1] Pers. comm. with the author.
[2] Pers. comm. with the author.

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