The State Bank of Pakistan (SBP) is pushing banks to lend more to the private sector to rev up economic activity and it thinks the best way to do this is to make it mandatory for them to accelerate housing finance.

When banks pour funds into construction projects, it increases demand for products of dozens of allied industries like cement, iron and steel, paints, electrical fixtures and products. So making banks bound to channelise a certain amount of funds towards housing and construction means ensuring growth in the manufacturing sector and in the economy. That is what the PTI government needs so desperately at the moment. Reviving the economy that slumped 0.4 per cent in the last fiscal year is important for Prime Minister Imran Khan for his political survival.

The SBP wants every bank to make housing loans equal to 5pc of their total domestic private sector lending. It has warned them of attracting penalty if they fail to do so and has promised to incentivise them for meeting the targets. Details of this carrot-and-stick show that the carrot part offers a reduced Cash Reserve Requirement (CRR) for the banks that meet or exceed their quarterly targets — and the stick part carries an increase in their CRR if they don’t. The SBP, in agreement with the banks, has already set four quarterly lending targets for them covering a full year until Dec 31, 2021, according to an SBP press release.

Whether home loans have an early positive impact on the overall private-sector borrowings will become clear in a few months

Since the funds that banks place at the central bank as CRR carry no return, a reduced requirement means they can use the freed-up money for lending or investment and increased requirement means blocking more of their funds from earning any return.

Apparently, this is a smart move to push banks to lend more to the housing sector. But this alone cannot address the broader issue of lower private-sector credit offtake. Latest SBP data shows that in a little less than four months of this fiscal year (between July 1 and October 23), banks’ net lending to the private sector was negative by about Rs96.5bn. In the comparable period of the last year, too, banks had reported net negative lending but at a much smaller scale — Rs39.2bn. The private-sector credit offtake remains negative because of two things: first, overall demand in the economy is not rising as fast as was expected and, second, industries and businesses are using low-priced credit offered post–Covid-19 to retire previous loans obtained at higher interest rates.

Pushing banks for greater housing finance by setting mandatory credit limits and introducing a carrot-and-stick scheme is one thing but creating space for banks and reminding them of their responsibility of financial intermediation is another. Between July 1 and Oct 23, the federal government borrowed Rs449bn from banks for fiscal support against Rs289bn a year ago. If the government is serious in reviving the economy, it should keep its borrowing in check so that the private sector is not crowded out. And, the central bank should continue to urge banks to lend more to the private sector.

Setting the mandatory housing finance target at 5pc of the total domestic private sector lending is expected to spur demand in not only the construction sector but also large-scale manufacturing and, in turn, the overall economy. How things will eventually pan out depends on the political resolve to continue with the scheme, the SBP’s ability to monitor banks’ loaning operations closely and banks’ readiness to make loans that meet all prudential regulations.

History tells us that when banks in Pakistan are encouraged to lend aggressively to a particular sector to help the government of the day fulfil its promises, they easily lose interest with the change in the country’s political setup. This is a real concern because unlike youth loans or yellow-cab loans, housing loans are supposed to be locked in for long periods. That is why banks were initially taking a cautious view of what is in the Naya Pakistan Housing Scheme for them and have now agreed to participate in it after the central bank has removed their concerns.

The government should keep its borrowing in check so that the private sector is not crowded out

However, the launching of the scheme under the umbrella of Naya Pakistan Housing and Development Authority has effectively assured them that the scheme is owned by the state and a change in political leadership would not upset it. It is in the backdrop of this reassurance — also conveyed to them by the government and the central bank — that some big banks are now gearing up for massively financing construction projects launched under Naya Pakistan Housing Scheme. What else has ignited their interest in the project is that it offers an opportunity to make two-way loans — to people interested in owning housing units and to hundreds of construction companies that are eager to build housing units but need banks’ funds.

How fast banks actually start disbursing housing loans and whether that has an early positive impact on the overall private sector borrowings will become clear in a few months.

But banks are expected to participate in the housing finance scheme in a big way because the government and the central bank want them to do this and also because it gives them an opportunity for bulk financing. The SBP’s carrot-and-stick scheme will start judging banks’ quarterly performance from next year. This means that banks’ private sector lending should initially get a boost in January-March 2021.

Published in Dawn, The Business and Finance Weekly, November 9th, 2020