KARACHI: The State Bank of Pakistan (SBP) on Wednesday introduced incentives and penalty mechanism for banks to promote housing and construction financing forcing them to meet housing sector targets or face penalties.

Building upon its earlier measure of setting mandatory target for banks to extend mortgage loans and financing for developers and builders, the SBP introduced this new mechanism to implement the government’s aim to encourage the construction industry.

On July 15, the SBP issued circular directing all banks to comply with mandatory targets of five per cent of their domestic private sector advances for housing and construction finance.

The banks were advised to develop time-bound action plan with quarterly financing sub-targets to enable periodical monitoring of actual progress being made for achieving the mandatory financing targets by the timeline prescribed thereof.

The new mechanism said the banks could face penalties if they fail to meet the targets.

According to this mechanism, commencing from December 31, banks will find an incentive of maintaining reduced Cash Reserve Requirement (CRR) with the SBP for the next quarter in case they achieve or exceed the financing target for housing and construction of buildings set for the quarter.

The amount of CRR to be maintained for the forthcoming quarter will be reduced by an amount equal to increase in housing and construction finance from June 30 to the end of the relevant quarter. This incentive will be subject to a ceiling of 1pc of the total demand and time liabilities based on which CRR is calculated.

“However, the banks will continue to maintain daily minimum CRR, which is currently at 3pc,” said the SBP. Accordingly, both conventional and Islamic banks and Islamic banking branches will continue to maintain daily minimum CRR.

“On the other hand, if the banks fail to meet the target, they will be penalised by requiring to maintain extra CRR by an amount equal to the shortage from the target,” said the SBP.

The banks do not earn any return on the amount of CRR maintained. “Therefore, a decrease in amount of CRR works as an incentive for banks, whereas an increase in amount of CRR serves as a penalty for banks,” said the SBP.

The housing finance and construction loans extended as a result of Balance Transfer from one bank to another will not be counted towards fulfilling mandatory advised targets of the acquiring bank for housing and construction finance.

“Consequently, such financing facilities will also not be eligible for lower CRR benefit as well,” said the SBP.

The SBP said it has been actively working with banks to support finance for the promotion of housing and construction of building activities in the country. The growth of housing and construction sector is vital for the economy, due to its linkages with a number of allied industries and potential for jobs creation and Pakistan has lower private sector credit to GDP than many comparable countries.

In order to enhance the flow of financing towards this sector, the SBP has required banks to achieve mandatory targets, equivalent to 5pc of their domestic private sector credit by December 31, 2021, to finance the housing and construction activities.

“Quarterly targets from December 31, 2020 till December 31, 2021 have been agreed with the banks,” said the SBP.

The SBP said it expects that this incentive mechanism, through changes in the CRR structure, will result in banks increasing their emphasis on housing and construction finance.

Published in Dawn, October 8th, 2020