State Bank of Pakistan (SBP) has introduced a mechanism to penalize the banks for any shortfall in meeting the target of housing finance whereas banks will be rewarded with incentives for meeting the targets.
The stick and carrot policy has been set to extend mortgage loans and financing for developers and builders, building upon its earlier measure of setting a mandatory target for banks.
According to this mechanism, commencing from December 31, 2020, the bank will find an incentive of maintaining a reduced Cash Reserve Requirement (CRR) with SBP, in the next quarter, in case they achieve or exceed the target of financing 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 an increase in housing and construction finance from 30th June 2020 to the end of the relevant quarter. This incentive, however, will be subject to a ceiling of 1 percent of the total demand and time liabilities based on which CRR is calculated.
Further, the banks shall continue to maintain daily minimum CRR, which is currently at 3 percent.
Conversely, if the banks fail to meet the target, they will be penalized by requiring maintaining extra CRR by an amount equal to the shortage from the target. It would be pertinent to mention here that banks do not earn any return on the amount of CRR maintained.
Therefore, a decrease in the amount of CRR works as an incentive for banks, whereas an increase in the amount of CRR serves as a penalty for banks.
SBP 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 the 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, SBP has required banks to achieve mandatory targets, equivalent to 5 percent of their domestic private sector credit by December 31, 2021, to finance the housing and construction activities. Accordingly, quarterly targets from December 31, 2020 till December 31, 2021 have been agreed with the banks.
The instructions will be equally applicable to all banks, including small banks. Nevertheless, such small banks, operating with less than ten branches, and specialized banks that do not have the infrastructure to extend the financing for housing and construction of buildings, may enter into an arrangement with any other partner bank and provide the required funding to it on mutually agreed terms and conditions.
The banks were also advised to develop time-bound “Action Plan” with quarterly financing sub-targets, inter alia, to enable periodical monitoring of actual progress being made for achieving aforesaid mandatory financing targets by the timeline prescribed thereof.
SBP expects that this incentive mechanism, through changes in the CRR structure, will result in banks increasing their emphasis on housing and construction finance.