The limit on banks’ housing exposure has been increased to 25%

The limit on banks’ housing exposure has been increased to 25%. The State Bank of Pakistan (SBP) upped banks’ exposure to housing and construction to 25% from 15% of their aggregate advances and investments on Wednesday.

On July 15, 2020, banks and DFIs were encouraged to meet obligatory financing requirements for housing and building development (residential and non-residential) of at least 5% of their domestic private sector advances by December 31, 2020.

To enhance housing and construction financing through capital markets and microfinance banks (MFBs), the SBP decided to allow banks and DFIs to count their housing and construction finance exposures toward meeting their mandated housing and construction finance targets.

Banks were permitted to finance directly or invest in bonds, TFCs, and sukuk issued by management firms of Real Estate Investment Trusts (REITs).

Banks were instructed to make investments in REIT units or shares subject to all other applicable restrictions.

They were permitted to invest in sukuk, or Pakistan Mortgage Refinance Company’s bonds (PMRC). However, investments in sukuk or bonds, as well as the amount of refinancing obtained through PMRC, will be deducted from the necessary target calculation.

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Financing to microfinance banks (MFBs) for the purpose of extending housing credit to qualified borrowers up to the extent of MFBs’ actual disbursements. Banks that lend to MFBs for home finance would be required to report such transactions separately to SBP.

The central bank stated that the aforementioned exposures will be considered in aggregate up to a maximum of 15% of a bank’s or DFI’s statutory targets for housing and construction finance on a particular day.

However, in a fresh circular issued on Wednesday, the exposure limit was doubled to 25%.

“The exposure limit for eligible investments and financing has been increased from 15% to 25% of obligatory targets for housing and construction finance,” the circular stated.

The government and SBP have been attempting to revitalise the housing and construction industries, but banks remain wary of extending housing loans.

On July 6, the SBP decided to penalise banks that fail to reach mandated housing and disbursement quotas.

“It has been agreed that banks that fall short of their targets in terms of housing units and disbursements will face penalties beginning July 31,” the SBP stated.

The government’s primary objective was to create ten million employment and five million affordable housing units within three years, however there has been no discernible progress in this direction.

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