Public-Private Partnership For Real Estate Asset Management Of The Nepalese Banking Sector

Nothing is more cumbersome for bankers than the recovery process of non-performing loan accounts. Due to the sluggishness of the general economy, people's and businesses' cash flows have been severely affected, leading to a significant impact on borrowers' repayment capacity. It has been observed that banks and financial institutions, including cooperatives, have been extensively publishing notices in national daily newspapers for loan recalls and auctions of mortgaged real estate properties. The default rate on loans has increased comparatively according to formal banking statistics (refer to provisional financial statements of BFIs recently published for the 4th quarter of 2079/80).

A considerable portion of credit, particularly business loans, channeled by BFIs has been secured against real estate properties in Nepal. BFIs and their management used to be confident in having real assets such as land and buildings as security for credit extended to borrowers, alongside assessing their repayment capacity. However, the ongoing challenging economic environment has revealed significant issues. Despite having sufficient security coverage from real estate properties for distressed loans, the credit exposure from defaulting customers seems challenging to recover, especially when selling the real estate property is the sole solution for ending loan obligations.

Nevertheless, selling real estate properties is no simple task. The primary challenge lies in finding buyers for these properties. When potential buyers discover that the seller needs to sell due to banking issues, they often offer minimal amounts, taking advantage of the borrower's difficult situation. If borrowers attempt to negotiate with other buyers, time elapses, and they face added pressure from increased banking obligations.

When borrowers' efforts to manage their accounts independently fail, BFIs are compelled to initiate collateral auctions. Even when auction notices are published, there might be instances of no bidders.

The general public is hesitant to buy auctioned properties due to potential legal and social issues that may arise over time. It's informally acknowledged that only individuals with courage and sufficient resources dare to bid on auctioned properties.

Furthermore, there appear to be only a few groups of people willing and able to purchase auctioned properties. This limited number of buyers for real estate properties puts both BFIs and borrowers at a disadvantage when settling credit exposure through property sales.

In the end, if no bidders are available, BFIs have to accept mortgaged real estate collaterals as Non-Banking Assets. However, banks lack expertise in real estate management, and accepting real estate property as NBA adds unnecessary headaches for top-level executives. Moreover, BFIs lack institutionalized experience in finding prospective buyers for real estate properties, nor are they permitted to utilize NBA property for revenue generation.

To address the issues related to managing distressed assets in the Nepalese financial system as outlined above, the author suggests initiating a nationwide discussion about the need for a transparent public institution in a Public-Private Partnership model. This institution would serve as a large-scale manager of real estate properties, engaging in buying, selling, and managing auctioned or collateralized real estate assets from the financial sector.

The institution would evaluate real estate properties at various locations at fair prices, taking multiple factors into consideration. It would directly purchase properties through negotiations with property sellers (including borrowers in cases of 100% Loan Loss Provision) and act as a mandatory bidder during BFI property auctions. The acquired properties could be sold, developed, or rented to generate revenue.

The estimated capital requirement for this institution is significant. It could be established as a company with a government shareholding of 25%, private business institutions holding 25%, and the general public holding 50% of the shares.

Furthermore, the establishment of such a company would enhance the transparency and reasonableness of recovery actions carried out by BFIs. As publicly owned institutions, the recovery processes of BFIs should be transparent and subject to public scrutiny. Loan recall and auction notices published in national daily newspapers should not be the only aspects visible to the public. After these notices are published, the subsequent processes remain hidden from public view.

To enhance transparency and integrity in the financial sector, it is suggested that the NRB (Nepal Rastra Bank) promptly instruct banks to disclose details about auctioned properties, including the price paid by the purchaser, on their website.

Moreover, the establishment of such a company would not only aid in managing distressed credit exposure through collateralized real estate property liquation but also help borrowers obtain better prices for their properties during auctions, which they might not achieve otherwise. The presence of such a company would also reduce the undue influence of a small group of prospective buyers of auctioned properties.