Rapid credit expansion, especially of overdraft, hire purchase and real estate loans, has started raising eyebrows of the banking sector regulator, as it suspects funds may be going towards unproductive sectors, such as real-estate, inflating asset prices.

Banks and financial institutions extended Rs96 billion in fresh overdraft, margin, home, real-estate and hire purchase loans in the first five months of the currently fiscal year. These institutions had extended Rs18.9 billion in loans to the same sectors in the first five months of the last fiscal year.

Acceleration in overall bank credit to private sector, including overdraft, hire purchase and real estate loans, is a matter of concern, says the latest macroeconomic report of the Nepal Rastra Bank (NRB), the banking sector regulator.

“Credit excesses in risky areas could divert bank credit from productive sectors. Therefore, banks and financial institutions are required to exhibit prudent and cautious lending behaviour going forward,” the report adds.

The regulator’s anxiousness largely stems from disbursement of fresh overdraft loan, which jumped 14 times to Rs41.7 billion in the five-month period. In the same period last fiscal year, banks and financial institutions had extended only Rs3 billion in overdraft loans.

Overdraft loans are extended for a period of one year and have to be renewed every year. Personal overdraft loans are generally diverted towards the real-estate sector. Hence, rapid expansion of this type of credit has started fuelling concerns that the property market may be overheating.

Also, banks and financial institutions extended Rs10.9 billion in real estate loans in the first five months of the current fiscal year, as against Rs5.6 billion in the same period a year ago. This kind of expansion of real-estate and overdraft credit has reminded many of the delirious boom witnessed by the real-estate sector in 2008-09, which ended in a bust.

Also, banking institutions disbursed Rs26.2 billion in hire purchase loans in the five-month period of this fiscal year, as against Rs2.8 billion in the same period a year ago.

“The far low level of non-performing assets at below 2 percent, especially among commercial banks, allowed banking institutions to divert lesser funds towards loan loss provisioning. This also helped banking institutions to generate higher profits. These factors, in turn, ensured financial sector stability,” says the report, adding, “Credit excesses in risky areas poses a challenge in maintaining financial sector stability going forward.”

However, bankers have been saying demand for loans has surged this fiscal year because of normalisation in the supply situation after the trade blockade imposed by India was lifted.