Easing credit restrictions to strengthen the economy

The recent decision by the Royal Monetary Authority (RMA) to lift the moratorium on home loans is a measured step towards reviving the construction sector. The move comes at a time when a wide range of policy measures are being implemented to support the economic recovery from the pandemic.

The reopening of housing loans, albeit for now only for residential and commercial construction, is an early sign of the easing to come. On June 8 last year, housing and hotel construction loans were suspended, primarily due to declining foreign exchange reserves, high concentration of loans and risk exposure in those sectors.

Lifting the moratorium on home loans will certainly boost construction activities, resulting in increased demand for materials, labor and ancillary services.

However, it is crucial to ensure that the reopening of credit does not result in excessive outflows of foreign exchange, which would take us back to square one. The government must regulate the import of construction materials, making it easier to access and purchase locally produced building materials wherever possible. This would have the dual effect of reducing imports while supporting a domestic industry that produces a wide range of construction materials.

The RMA also reviewed the Prudential Regulations 2017 in relation to the risk weight requirement for capital formation. One of the key changes is the introduction of a 150% risk weights for credit exposures exceeding 30%. the total loan portfolio of a financial institution. This measure was introduced to ensure that financial institutions maintain a diversified portfolio while limiting exposure and the high concentration of loans in any single sector.

In February this year, the housing sector saw the largest credit allocation at Nu 64.5 billion, with an average credit exposure of 31% for most financial institutions. The reopening of housing credit could result in further escalation of credit concentration in this sector. Financial institutions would need to be cautious and implement a sound risk assessment framework to assess the viability of construction projects, ensuring that lending is to sustainable ventures.

Given the current market dynamics of the hospitality and tourism industry, the RMA has decided to continue the moratorium on loans for hotel construction. This is a strategic decision. According to the Department of Tourism, there are 395 certified hotels in the country, not counting a few homestays.

With the tourism industry slow to recover and the sector’s seasonality, hotels are struggling with low occupancy rates. In the face of fierce competition, hotels are resorting to price cuts to attract more guests. More hotels in an already saturated market could exacerbate these challenges, increasing financial risks for both hotels and financial institutions.

While measures are being implemented to revive tourism, increase year-round arrivals and address seasonality concerns, the central bank and financial institutions will need to keep a close eye on how the economy is developing before resuming lending to the sector.