Home Loan Option
The loans are easily available and the interest rates are also lower

If you flip the pages of magazines, newspapers or switch on your television set your attention is caught by ads from finance companies or commercial banks offering their home loan products. The borrowers have never had it so good. The loan amount is not an issue. It isn’t restricted to 40-50% of the project cost anymore. Some banks like Development Credit Bank Ltd., are even willing to offer up to 100%.

If you are already a borrower, all this is not news to you. What you will be interested in would be the interest rates and tax components. Here are some important components of home loans that both who have already borrowed and those who are planning to borrow should know.

The finance companies pioneered the home loan in Nepal, but when also the commercial banks like Everest, Standard Chartered, Nabil, Bank of Kathmandu started to offer home loans, the finance companies fell behind as the cost of funds of the finance companies is higher by 2 to 3 percent and they could not compete with banks on the interest rates. However, people still go to finance companies because borrowing from them involves less hassle. The banks require lot more documents than finance companies.

Though only few financial institutions have separate home loan department, they are providing home loan for the individuals from their retail banking department or the like. But if the client is a company it is no more a home loan, but rather it comes under the project finance.

Interest Rate

There is no doubt that this is the most important component of a home loan. A lot depends on how it is calculated. A monthly reducing balance method will reduce your principal outstanding at a much faster rate than an annual reducing method. Though till now no finance company or bank has offered a daily reducing balance method (a practice adopted by banks in India), it will not be of much use to the salaried segment of customers since home loan repayment is normally made on a monthly basis.

The interest rate varies from a bank to the other. It is as low as 8 percent and as high as 12 or 13 percent. Also, longer the loan period, higher the interest rate.

Eligibility

If your are a permanent employee of a company or self employed or having your own business and your gross monthly income along with that of your spouse is at least double of the monthly installment of the loan, you are eligible for a home loan. Age-wise, you should not exceed 60 years of age at the time of the loan sanction. Some banks have only 50 years of age limit.

Floating or Fixed

That is one dilemma for many. If you opt for a fixed loan, the fluctuations in the interest rates will be of no relevance to you. You will continue to pay the same equated monthly installment (EMI) for the entire loan period. On the other hand, in a floating rate it can vary depending on the interest rate scenario. In the present situation where the interest rates are likely to be reduced, it is not advisable to go for a fixed loan if you are borrowing for a long period for, say, 15 or 18 years. It is better to fix your liability at the current level if interest rates are likely to move upwards. On the other hand, if you are looking for a short-term, betting on floating rate is not a bad idea. However, you should be careful as some of the finance companies are found to charge the interest rates the way they like. For example, if the interest rate increases then they charge increased rate to the client but if it is reduced they take the interest rate of the time you took the loan.

How much to borrow?

Earlier, you didn’t have the problem of fixing the loan amount because banks and finance companies were strict. You always got less than what you actually wanted. Now, the picture is very different. Lenders are only too happy to give you a higher loan and it is for you to decide the loan amount. For example, NB Bank and Everest Bank are offering finance up to 40 lacs and Nepal SBI Bank Ltd. up to 50 lacs rupees to build or purchase a new house. Similarly, Standard Chartered Bank and Nepal Development Bank are offering loan of 75 lac rupees if this amount does not exceed 60% of the land value.

If you are in the age group of 25-35 years, opt for step up repayment option. This will keep the EMIs in the initial years lower and offers you the option of increasing the installment amounts over subsequent period.

In India the huge EMIs are not an issue, as the Indian government offers tax benefits to the individuals. But in Nepal only the companies are entitled for such tax benefits on the interest component.

While planning your home loan, try and include all related costs like registration into your loan amount. A home loan is the cheapest loan at present and if you borrow more you will not face the problem of shortage of funds even in the event of cost overrun. Moreover, when the going is good for the borrower, you should not hesitate to make good use of it. The favourable interest rates available today make buying property attractive. Because of this, the salaried segments are finding it easy to buy a home.

The loan processing charge of most of the banks is 1% and if you want to prepay the loan it is allowed with a surcharge of 1% of prepaid loan amount. The moratorium period is normally up to one year depending upon your request and relation with the financial institute.

Also the numbers of options in the market are increasing. The property segment is looking up and coming out with options to suit every budget and need. You can get the loan to purchase buildings, construction of buildings, purchasing lands and even renovation and extension of building.

The home loan availability is proving a major advantage to all those looking for a house of their own.

What Banks Should not Do

With more than a dozen banks in the country and more than two decades of private sector commercial banking history, there are some very important things that banks should always avoid doing, deriving learnings from the past  in the country as well as elsewhere.

The Human-side:

Managerial hubris:

In Nepal, banking job is glamorous, challenging, well paying and decent. It is certainly one of the most preferred careers in the country and there is no reason why it should not be; there is brand, there is money and there is fun as well. However, this does not mean that bankers are gods and that they should regard themselves invincible. But this is precisely what one can observe in the Nepali banking sector. It all boils down to the organisational structures - a perfect pyramid where, as people go up, their power increases and they think they are the best and whatever they decide is correct. This tendency of taking all decisions without consulting others leads to committing mistakes. With only a handful of people making many decisions, the possibility of getting carried away with the hype and power increases. Also, not all decisions should be made at the top. In other words, the authority and responsibility should be decentralised. Sometimes, even the lowest levels can give the right feedbacks, as they are the ones in direct contact with the customers. Banking history shows that managerial hubris has led in many instances to big Chapter 11 registrations. To point out a few, the banking mergers and acquisitions of the 1990s, the collapse of Barings PLC, the fall of Orange County and the colossal losses of Daiwa should be the eye-openers. One can never say, but there maybe another bank round the corner in the brink of collapse, being a victim of managerial hubris. 

Poor Human Resource Management:

Banking being one of the most promising industries of the country attracting huge foreign investment and foreign technical assistance (in some cases), one would imagine that banks are professional in nature and that human resource there is good. This aspect may be good in some banks but in most of them, it is pathetic. There is still very little being done in this field. Training and development is mostly confined to higher-level staff members. The recruitment, selection and promotions are mostly based not on the performance but on the relationship with the bosses. So, it depends not only on the business one has got for the bank or the cost that one has reduced for the bank, but on the number of drinks you have with the boss or the political clout one has around him - professional ethics are going wrong here.

The ‘Jack of all traits syndrome’:

Visit a local commercial bank branch three times only to discover that faces have changed. There will be three different people serving you in each day although it’s the same job. What message can one derive from all this? This means everyone in the branch does everything. It is good to train staff in all aspects and make them capable of doing everything because this avoids redundancy of the department in absence of any one of the staff members. However, there must also be jobs assigned according to one’s capacity and qualifications. Banks should promote specialisation for high efficiency.

Politics in banks:

For most bankers, politics has become an integral part of survival in the corporate jungle. Politics does not happen only in Nepal but also in other countries but the extent in which it happens here is mind-boggling. Most often, employees who are good at politics tend to grow faster than others, who despite their performance and qualifications, do not have anyone to pull them up or do not know how to push themselves against the others. Politics is not limited to promotions but also determines the employee’s placement in the organisation chart. Politics thus in many instances shapes the corporate structure both horizontally and vertically. To obtain the required professional edge in terms of competition, bank management should treat employees fairly and motivate each of them equally, irrespective of their political clout.

The Non-human side:

Restructuring of financial statements:

To please the shareholders and to reap handsome bonuses, bank managers tend to restructure their balance sheets just before the end of fiscal year. Mainly, this tendency is there due to the bad loans, which they think can be recovered in the future. Basically, banks try to avoid loan loss provisions. Few shareholders in Nepali companies are VIP shareholders due to their clout and influence management decisions. Such VIP shareholders must know the fact that loan loss provisions not only protects the bank from future collapse, but also strengthens the capital base. Even the bankers have to realise the fact that they survive only if the bank survives.

Lack of proper branding:

Orange in England would remind the English of Vodafone, Cold reminds many of Coke and a growing child in India would remind Complan - that is what branding is. The marketing expenditure of banks in Nepal is still very low compared to what they can spend to promote their brand and business in general. With Nepal being the member of WTO, branding has never been as important as now for the Nepali banks. Before the foreign banks enter the country in the new WTO regime, the local ones have to get their feet firm on the ground, otherwise, one can imagine what the end result would be. The trend is healthy in this aspect but still not healthy enough. It is high time banks realised this fact and got prepared before it is too late.

Poor R&D:

With more than two decades under its belt, the banking industry still lacks a proper R&D department in banks. There have been changes taking place in the sector but they are not enough. Product innovation is still not the priority of the banks. To survive the cut-throat competition and to sustain business in the long run, investment in R&D is a must. Nepali banks should try and come up with modern products having local touch. The focus should be the local customers and products and modus operandi should cater not only to the needs of the urban populace but also of the rural folks. Banks have to learn lessons from some of their global counterparts who have been spending bulk of their money in Research and Development for sustainable growth.

Relationship lending:

Bulk of the profits of the banks in Nepal comes in the form of interest income from lending. However, due to lack of proper credit evaluation procedures, they are still losing chunk of their profits in bad loans. Bad loans may not be completely eliminated, however, they can be reduced with prudent credit proposal evaluation methods. Out of many reasons of loans going bad, relationship lending is the dominant one. When loans are disbursed not based on their quality but on the quality of the relationship the borrower has with the bank management or the board, the possibility of the loans going bad are quite high. After the loans are disbursed, even the best relationships are ruined due to moral hazard on the part of the borrowers. Hence, it is necessary that this does not become the norm.

These points are not exhaustive; there may be some other basics that banks may be missing or that banks should avoid doing. Also, the points mentioned above cannot be generalised for all the banks. There are a few banks, which are trying to become more and more professional and they are becoming successful in doing so. With the prescription above, banks will certainly rule themselves out of big losses.

(Pandey is doing M.Sc in International Banking and Finance in London Metropolitan University, UK)

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