Nepal Housing Development Finance Company (NHDFC) Operating in Kathmandu Valley

Nepal, a predominantly rural yet rapidly urbanizing nation, has faced significant challenges in providing adequate housing finance. In the late 1980s, access to institutional housing finance was nearly nonexistent, with banks considering housing an unproductive sector. The establishment of the Nepal Housing Development Finance Company (NHDFC) in 1990 marked a pivotal moment in addressing these challenges. This summary assesses NHDFC’s role, achievements, and future prospects in the context of Nepal’s evolving housing finance landscape.

Nepal’s urban population grew at an average annual rate of 6.65% in the early 2000s, compared to the national population growth rate of 2.25% (Central Bureau of Statistics, 2001). With 58 municipalities and a total urban population of 3.28 million, housing demand surged. However, data from the 1991 Nepal National Housing Survey revealed that 90% of the housing stock was in rural areas, with only 0.3 million urban units. The quality of housing was poor, with 50.5% being temporary and 41.2% semi-permanent. Access to basic services like water supply, sanitation, and electricity was also inadequate for many households.

In the late 1980s, housing finance was virtually inaccessible through formal institutions. Families had to self-finance, often through incremental construction and informal lending at high interest rates (20% to 40% per annum). The emergence of a new democratic government in 1991 led to the establishment of private commercial banks and finance companies, though housing finance remained a low priority initially. Political crises and the Maoist insurgency from 1996 to 2000 reduced commercial lending, prompting financial institutions to shift focus to home loans from 2001 onwards. This shift was further driven by increasing deposits and limited commercial lending opportunities.

The Nepal Housing Development Finance Company (NHDFC) was established in 1990 under the Finance Company Act 1985, initiated by the Ministry of Physical Planning and Works (MPPW). NHDFC was the first company in Nepal dedicated exclusively to housing finance. Its primary objectives were to mobilize housing finance, provide short and long-term loans for housing-related activities, and conduct housing projects and related services. However, its role has been confined mainly to providing home loans and receiving fixed deposits.

NHDFC’s current loan disbursement stands at 4.548 million US dollars, benefiting 6,000 households since its inception. The company offers fixed deposits with interest rates ranging from 7.5% to 9.25% and home loans at 15% per annum for a maximum period of 15 years. Loan amounts have increased over time, with the range from 4,013 to 6,688 US dollars per household from 1990 to 2000, and up to 20,066 US dollars from 2000 onwards. NHDFC’s loan loss provision is below 5%, and 90% of lenders are regular in their monthly installments. The majority of borrowers are government employees, indicating NHDFC’s accessibility to middle and low-income groups.

Despite its achievements, NHDFC faces significant challenges. The increasing trend of financial institutions offering home loans at lower interest rates (8.5% to 9.5%) compared to NHDFC’s 15% could lead to a gradual shift of clients to private institutions. Additionally, government employees, NHDFC’s major clients, can now obtain home loans from the Nepal Provident Fund at a lower interest rate of 11.5%. NHDFC’s future sustainability is uncertain, especially if commercial lending opportunities expand post-insurgency.

To ensure its survival and fulfill its social responsibility, NHDFC should adopt a dual role: commercial and social. Commercially, NHDFC must review its staffing, expenditures, and policies to become more competitive, aligning its interest rates with private financial institutions. Socially, NHDFC should focus on housing finance for low-income people, including group lending, micro-finance, and funding for low-cost building materials, training, and research. The government, particularly the MPPW, should prioritize these areas and support NHDFC’s expansion beyond Kathmandu Valley to other towns in Nepal.

The establishment of NHDFC was a significant step in addressing Nepal’s housing finance challenges. While it has achieved notable success in providing home loans to middle and low-income groups, it must adapt to the evolving financial landscape. By adopting a dual role and enhancing its competitiveness and social outreach, NHDFC can continue to contribute to Nepal’s housing sector and support the nation’s urbanization process.

For further reading and detailed information on NHDFC and Nepal’s housing finance sector, the following external links are recommended: