The recent decision by the Royal Monetary Authority (RMA) to lift the moratorium on housing loans is a measured step towards revitalising the construction sector. This move comes at a time when a wide range of strategic measures is being put in place to support the post-pandemic economic recovery.

The reopening of the housing loans, although only for residential and commercial constructions for now, is an early indication of more relaxations to come. Loans for housing and hotel constructions were suspended on June 8 last year primarily to manage the dwindling foreign currency reserve, high credit concentration, and risk exposure in these sectors.

The lifting of the moratorium on housing loans will certainly stimulate construction activities, leading to increased demand for materials, labour, and ancillary services.

However, it is critical to ensure that the reopening of the loans does not result in excessive outflow of foreign currency, leading us back to square one. The government must regulate imports of construction materials by facilitating access to and purchase of locally produced construction materials wherever possible. This would have a dual impact of reducing imports while supporting domestic industries that manufacture a range of construction materials.

The RMA has also revised the Prudential Regulations 2017 for risk-weight requirement on capital accumulation. One of the key changes is the provision of applying 150 percent risk-weight to loan exposures exceeding 30 percent of a financial institution’s total loan portfolio. This measure has been put in place to ensure that financial institutions maintain a diversified portfolio while reducing exposure and high credit concentration in any single sector.

At Nu 64.5 billion, the housing sector accounted for the highest credit allocation as of February this year, with an average 31 percent loan exposure for most financial institutions. The reopening of the housing loan can lead to further escalation of credit concentration in this sector. Financial institutions would have to be cautious, and implement robust risk assessment frameworks to evaluate the viability of construction projects, ensuring that loans are extended to sustainable ventures.

Given the current market dynamics of the hospitality and tourism sectors, the RMA has decided to continue the moratorium on loans for hotel constructions. This is a strategic decision. According to the Department of Tourism, there are 395 certified hotels in the country, excluding a number of homestays.

In wake of the slow recovery of tourism business and due to the seasonal nature of the sector, hotels are grappling with low occupancy rates. Amidst cutthroat competition, hotels are resorting to price cuts to attract more guests. More hotels in the already saturated market could exacerbate these challenges, increasing the financial risks for both hotels and financial institutions.

While measures are being implemented to boost tourism, drive year-round arrivals, and address seasonality issues, the central bank and financial institutions will have to keep a keen eye on how business picks up before resuming lending to this sector.