Banking Khabar / Real estate transactions have slowed in recent times, while the value of property pledged as collateral has also weakened. This has created an increasingly difficult situation for Nepal’s banking sector.
Restrictions on land subdivision in many local governments across the country have begun affecting real estate transactions, as well as loan disbursement and debt recovery by banks and financial institutions. Under the Land Use Regulations, land subdivision has been suspended since July 16 in local governments that have not completed land-use classification. The impact is being felt directly by borrowers seeking to repay loans by selling their land, as well as by banks responsible for managing collateral.
The suspension of land subdivision during a period when real estate transactions are usually active has created problems in the property market. Individuals and businesses seeking to manage their financial obligations by dividing and selling portions of their land have been particularly affected. Some borrowers who took loans from banks and financial institutions had planned to sell their land to repay principal and interest. However, the inability to subdivide their plots has prevented them from completing such transactions.
This has also added challenges to banks’ loan recovery processes. When borrowers are unable to sell mortgaged land and repay their loans, debt recovery may be affected. Similarly, when banks are required to auction collateral following loan defaults, obstacles in the real estate market may create further difficulties. Borrowers and banks are particularly affected in situations where only a small portion of a plot needs to be sold while the remaining property is retained.
Land Classification Completed in Only 422 Local Governments
According to the Ministry of Land Management, Cooperatives and Poverty Alleviation, only 422 of the country’s 753 local governments have completed land-use classification so far. The remaining 331 local governments have yet to complete the process.
Most of the local governments that have not completed land classification include major urban areas. Of the country’s six metropolitan cities, only Lalitpur and Pokhara Metropolitan Cities have completed the land-classification process. The process remains unfinished in the other metropolitan cities.
Even Kathmandu Metropolitan City, located in the country’s capital, has been unable to complete land classification. The emergence of land-subdivision problems in urban areas, where demand for land for commercial and residential purposes is particularly high, has created further complications in real estate transactions.
Sluggish Real Estate Market Puts Pressure on Bank Lending
The real estate sector is an important area of lending for banks and financial institutions. A slowdown in this sector can affect both new loan disbursements and the recovery of existing loans.
According to Nepal Rastra Bank data, loans extended by banks and financial institutions to the real estate sector had declined by the end of mid-August in fiscal year 2026/27 compared to the same period in the previous year. Real estate lending by commercial banks had also decreased.
However, it would not be accurate to attribute the decline in lending solely to restrictions on land subdivision. Overall economic conditions, demand for credit, the state of the real estate market and banks’ lending policies also influence credit flows. Nevertheless, obstacles arising from incomplete land classification and restrictions on subdivision have created additional difficulties for the expansion of real estate transactions.
Government revenue generated through real estate transactions is also at risk of being affected. A decline in land purchases, sales and property ownership transfers could reduce revenue collection by local governments and the government as a whole.
Policy Uncertainty Creates Problems for Both Borrowers and Banks
Land-use classification is necessary to ensure the scientific use of land and protect agricultural areas. However, delays in completing the classification process have placed additional burdens on landowners, businesses, borrowers and the banking sector.
For borrowers who have taken loans from banks, selling their assets to manage financial obligations when facing difficulties is a natural option. However, restrictions on land subdivision have limited this option as well. This could increase pressure on borrowers’ repayment capacity.
Effective collateral management and loan recovery are equally important for the banking sector. When mortgaged property cannot be sold easily, the loan recovery process may be delayed. If such conditions persist for an extended period, banks could also face additional challenges in managing non-performing loans.
Although land classification is necessary, delays by local governments in implementing the process have created a situation in which economic activities are being affected. Therefore, it is essential to balance the implementation of land-use policies with real estate transactions and resolve the uncertainty surrounding land subdivision.
