Do South Asian Lenders Assume More Risk by Offering Real Estate Loans?

South Asian countries show significant differences in real estate market trends and mortgage lending dynamics that make them unique worldwide. Banks specialized in real estate loans to households in these countries could be exposed to different risks from the rest of the world that could affect their risk of bankruptcy or their policy on nonperforming loan (NPL) management. This chapter investigates the effect of banks’ exposure to mortgage lending on their financial stability, measured by two different proxies: the bank Z-score and the NPL ratio. Our sample includes a representative sample of banks based in South Asia (Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka) from 2012 to 2016. The results show that an increase in the share of mortgage lending for banks with a diversified lending portfolio reduces the probability of default by financial institutions (Z-score), as well as the NPL ratio. On the other hand, the choice to increase the mortgage exposure of banks that are already specialized in the sector could increase lenders’ risk of bankruptcy.