SBP revises mortgage lending targets for banks – Journal

KARACHI: The State Bank of Pakistan (SBP) has come up with a new measure to help banks meet their mandatory housing and construction finance targets.

Despite booming profits in 2021, banks have remained sluggish in disbursing approved housing and construction loans.

On July 15, 2020, the SBP set mandatory targets that required lenders to provide mortgages and financing to developers and builders. It required banks to increase their housing and construction loan portfolios to at least 5% of their total credit to the private sector by December 2021.

In addition to previously notified exposures, the SBP has allowed banks, through a recent circular, to book their “wholesale loans to microfinance providers and housing finance companies for later funding under the Naya Pakistan Low-Cost Housing (NPLCH)” in their mandatory targets. NPLCH is one of the three components of the Kamyab Pakistan Program (KPP).

Lenders will count wholesale lending to microfinance providers towards mandatory targets

The SBP had also imposed a penalty on banks that failed to meet their mandatory targets as of July 31, 2021. The penalty is to miss the targeted number of housing units as well as the disbursement amount.

In April 2021, the SBP assigned mandatory monthly targets to banks in proportion to their respective shares in total bank assets.

Given the slowness of the banks, the SBP and the government began to pressure them to provide loans for housing and construction. The central bank has made it mandatory for lenders to allocate 5% of their total loans to housing and construction, given the key role this sector plays in ensuring higher economic growth and increased employment.

“The pace of loan disbursement is not encouraging. The industry is too big. It requires trillions of rupees, not millions, in funding,” said Kamran Baig, a Karachi-based builder and developer. He said banks were reluctant to take lending risks despite government support.

“The government should allocate up to 500 billion rupees to this sector in the 2022-23 budget to ensure a high growth rate,” Baig said.

A sudden increase in disbursements was observed in 2021-2022. Funding for housing construction increased from 47.5 billion rupees to 151.1 billion rupees in the first seven months of the current financial year. The outstanding amount of these loans at the end of January was up 72.3% compared to a year ago.

Bankers said there were several reasons for a sudden increase in loan disbursements. The main cause of this jump, however, was the continued pressure exerted on commercial lenders by the government and the central bank. Moreover, the threat of regulatory sanction has also kept banks active in recent months.

Banks had to pay a base penalty for missing their targets until July 31, 2021, while any shortfall in the following months could expose them to a higher penalty.

The Association of Banks of Pakistan has developed a benchmark income estimation model through a consultative process before the start of 2021-22.

The SBP believes that the estimation model will alleviate the difficulties the general public faces in accessing housing finance under the government’s premium grant scheme.

Posted in Dawn, February 27, 2022