The operations of many BFIs have been impacted due to physical damage to their properties and ensuring that the offices are fit for people to work from. The damage to Nepal Rastra Bank offices had impacts on the operations of the entire banking system.
BFIs have been standing on a huge liquidity surplus in the last two fiscal years, a result of which the liquidity crisis in the market might not be immediately felt. The impact might be visible only once and if property developers and individual home buyers who have availed of loans against their property start to default on payback of loans. However, given that the NRB has capped the interest spread at not more than 5%, a huge rise in interest rates is not expected in the near future. There has also been a ceiling on withdrawal of money from banking system each day that has hampered day to day liquidity. Due to the unclear directives of the Central Bank on transfer of money for relief purposes, money transfer companies were used for transfer of funds.
Real Estate Lending will be under watch
According to data from the NRB, 59% of the BFI loans are disbursed against collaterals of land and buildings. Of the total lending of NPR 1.29 trillion, land and buildings worth NPR 769.92 billion have been kept as collateral. Additionally BFIs also have a loan exposure of around NPR 56 billion in the real estate sector which includes high rise apartments as well as land development projects. This will therefore negatively impact the financial sector as the earthquake will handicap the ability of people to payback their loans. One reason behind this is that many households generate cash flow to pay off loans through renting out flats and residential buildings. Additionally it is expected that recovery of loans from property developers and apartment purchasers will be difficult given the damages caused to properties.
No Immediate Impact on Interest Rates
While the Rupee is depreciating against the dollar on account of devaluation of the Indian Rupee, immediate impact on interest will not be seen. While inflation will be high due to increased prices on account of supply chain disruption and high levels of demand of food commodities, this is seen as short term phenomenon.