Banks tighten credit to real estate, construction sectors
View(s):Banks have stiffened credit standards on real estate and construction lending, countering a rise in non-performing loans in the two sectors that have been critically affected by the slowdown of the economy.
“All banks have clamped down on lending,” a property developer told the Business Times. A top commercial banker confirmed this saying that most financial institutions are now stringent in lending to the construction sector.
The country’s real estate sector endured a tough operating environment in 2017 with real estate sector analysts saying this year will be tougher as the country has now been hit by a disastrous political battle for power. President Maithripala Sirisena end last month replaced Prime Minister Ranil Wickremesinghe with former President Mahinda Rajapaksa, but the former has called the move illegal and refuses to relinquish office.
In this backdrop, the crisis-hit economy will be affected and the real estate sector will feel the ramifications. Economists warn this situation could pose dire consequences for Sri Lanka’s credit rating and financial markets which will also impact on the real estate and construction sectors.
The construction sector which was once considered to be a risky segment has a non-performing loan ratio of 3.4 per cent in line with the industry. Analysts are saying this sector will lead to this dicey situation. The Central Bank said Non-Performing Loans (NPL) in total had already risen to 3.5 per cent from a low of 2.5 per cent last year, but it was below historical trends. With the new crisis situation analysts say that the construction sector NPL will rise.
Another on-going difficulty in the industry is lack of skilled labour, which is causing massive delays for various projects. As stated by Sri Lanka’s Access Engineering, one of the reasons for this is the increasing employment rates and that aspiration of workers who are seeking higher salaries. In addition to that, construction workers are also faced with many health hazards at work.
The industry is also facing a challenge in getting sufficient main construction elements like sand, metal and cement. As a result the continuous supply of high quality products by builders is being questioned – especially by high rise apartment owners. The need to use alternate substitutes with the support of technology is crucial in order to cater the construction sector, builders say. The growing demand for sustainability is also one of the main impediments the industry is facing right now.