New rule on collateral New rule on collateral to hit realty sector to hit realty sector

KATHMANDU, Sept 19: People aspiring to buy land and housing taking loans from banks and financial institutions (BFIs) by pledging the same as collateral will not be able to have their plan materialized now.

The government this week imposed a new rule, whereby buyers will not be able to pledge the land and housing as collateral at BFIs on the very day they bought it.

Issuing a circular, Ministry of Land Reforms and Management (MoLRM) this week instructed all Land Revenue Offices (LROs) across the country not to allow buyers pledge the property being bought as collateral on the same day.

“Based on the circular, we have already stopped registering the transactions wherein people seek to pledge the same as collateral immediately after ownership takeover,” said Krishna Prasad Joshi, official at Kalanki LRO.

“We allow pawning on the next day of ownership takeover though,” he told myrepublica.com. However, opening the collateral a day after does not serve the interest of banks, said bankers, adding that the new rule will badly squeeze banks credit in the realty sector.

So far, LROs used to allow pawning of property at the same instant of transactions and issue letter to the banks that they will not allow collateral´s further transactions until the bank opens it instantly.

Under this practice, the banks used to complete all formalities like clear identification of shape and size of the land and housing plot number and its monetary valuation, prior to the transactions.

And on the day of transaction, they used to issue checks to the sellers on behalf of the buyers as soon as LROs transfer ownership and simultaneously get a stay letter on further transaction of the collateral from LROs.

“But the new rule has made it impossible for people lacking other collaterals to buy land and housing with BFIs finances,” said Rajan Singh Bhandari, vice president of Nepal Bankers´ Association and chief executive of Citizens Bank International.

Bhandari stated that no BFI can issue loans to the customers without being assured of collateral and with LROs restricting their pawning on the very day of transaction, people will simply fail to get the loans from the banking system.

The new rule will hit commercial banks´ credit flow in the sector as well. Although the central bank has long tagged realty as vulnerable sector and capped BFIs loans in the sector, real estates and housing is still one of their favorite investment areas.

The rule has turned land and housing developers anxious, especially as realty transactions have nosedive with banks tightening loans after Nepal Rastra Bank capped their lending in the sector in January.

“The NRB cap had already turned the market jittery. The new rule, which makes loans inaccessible to buyers, will further mess up the situation,” said Ichchha Bahadur Wagle, the vice president of Nepal Land and Housing Developers Association. He urged the government to revoke the decision immediately.

Chhavi Raj Pant, secretary at MoLRM, meanwhile, said that the new rule was imposed with a view to systematize LRO operations. “It might create inconvenience in the market. But eventually it will safeguard the interest of all, including buyers and bankers,” he said.

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