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

Despite booming profits in 2021, the banks remained lethargic in the disbursement of approved loans for housing and construction.

On July 15, 2020, the SBP set mandatory targets that required the lenders to extend mortgages and financing to developers and builders. It required the banks to increase their housing and construction loan portfolios to at least five per cent of their total private-sector credit by Dec 2021.

In addition to the previously notified exposures, the SBP allowed banks through a recent circular to count their “wholesale lending to microfinance providers and housing finance companies for onward financing under the Naya Pakistan Low-Cost Housing (NPLCH)” towards their mandatory targets. NPLCH is one of the three components of Kamyab Pakistan Programme (KPP).

Lenders to count wholesale lending to microfinance providers towards mandatory targets

The SBP had also imposed a penalty on the banks that fell short of their mandatory targets with effect from July 31, 2021. The penalty is on missing the targeted number of housing units as well as the amount of disbursements.

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

In view of the banks’ sluggishness, the SBP and the government started pressuring them to extend housing and construction loans. The central bank made it mandatory for the lenders to allocate 5pc of their total loans for housing and construction keeping in view the key role this sector plays in ensuring higher economic growth and increased employment.

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

“The government needs to allocate up to Rs500 billion to this sector in the 2022-23 budget to ensure a high growth rate,” said Mr Baig.

A sudden increase in disbursements was witnessed in 2021-22. Financing for house building grew Rs47.5bn to Rs151.1bn in the first seven months of the current fiscal year. The outstanding stock of these loans at the end of January was up 72.3pc from a year ago.

Bankers said there were several reasons for a sudden increase in loan disbursements. The primary cause for the jump, however, was persistent pressure on commercial lenders from the government and the central bank. In addition, the threat of penalty from the regulator also kept the banks active in recent months.

The banks had to pay a baseline penalty on missing their targets until July 31, 2021, while any shortfall in subsequent months could expose them to a higher penalty.

The Pakistan Banks’ Association developed a baseline income estimation model through a consultative process before the beginning of 2021-22.

The SBP believes the estimation model will ease the difficulties that the general public is facing in accessing housing finance under the government’s markup subsidy scheme.

Published in Dawn, February 27th, 2022