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In many economies, housing and construction finance is a key portfolio for commercial banks and specialized financial institutions. In Pakistan, housing finance is almost non-existent. It's a high margin business and ideally banks should be happy to engage. However, a host of supply side issues - such as absence of foreclosure laws, poorly maintained records of land titles, absence of regulating body for developers/builders, non-vibrant debt capital market and government's over reliance on bank borrowings are but a few factors that have hindered the development of a vibrant mortgage finance environment. On the demand side, affordability is the main problem due to high and volatile interest rates.

Developing housing market is a dream of prime minister Imran Khan. When a housing task force was formed, there was no interest from banks or the State Bank of Pakistan (SBP) to take housing finance seriously. But PM's persistence has brought everyone on the same page. The role of Naya Pakistan Housing and Development Authority (NAPHDA) and SBP is commendable for making this possible. The story of the construction package started in April when an amnesty scheme and fixed tax rated regime were announced. There were some earlier efforts in this regard but the International Monetary Fund (IMF) was not on board. In every crisis there lies an opportunity. The PM took advantage of the COVID crisis to bring life to the housing opportunity. Things have started rolling now.

The SBP has now made it mandatory for banks to have 5 percent of their loan portfolio in housing and construction finance by Dec-21. The targets are not indicative as is the case for SME finance. SBP has employed a carrot and stick approach for banks to comply with. The incentive for maintaining a higher than required portfolio is less whereas, the penalty for slackers is high. There is relaxation or additional burden on cash reserves requirement (CRR) for banks on a quarterly basis. In normal circumstances, a bank is bound to keep 5 percent of its deposits on two weeks' average with SBP. The quarterly targets for housing are to be set individually for banks. If a bank is giving higher loans than the target for housing and construction, its CRR requirement for the next quarter is reduced based on incremental loans with maximum relaxation of 1 percent of CRR. In case of penalty, if a bank is short of the target, the same amount has to be put extra as CRR. Plus, there is no limit of 1 percent of CRR in penalty.

For example, a bank's housing and construction portfolio is of Rs10 billion by Dec-20 and the agreed target is Rs15 billion for Mar-21. If the bank reaches Rs15 billion, its CRR requirement would reduce by Rs5 billion. Let's assume the bank's deposits are of Rs1,000 billion, and its CRR is Rs50 billion. Now its CRR would be reduced to Rs45 billion. However, if the bank reaches Rs14 billion mark by Mar-21, its CRR would increase by Rs1 billion to Rs51 billion. The opportunity cost of missing target by Rs1 billion is a loss of Rs6 billion (in terms of CRR) for this case. Moreover, the loss will carry over in the next quarter. The strict penalty would compel even non-interested banks to take a position in housing finance. The loan portfolio is bound to increase.

On the supply side, builders are happy with a fixed tax regime. Many builders and developers have whitened their money in the previous amnesty schemes; but the amnesty is important for first buyers of built housing units. A builder usually sells some units at the start of the project to finance construction. Majority of early buyers are sleeping investors. The amnesty scheme is lucrative for these. There is no limit for any investor to buy and there will be no questions asked about the sources of income; the deadline to avail the amnesty being Dec-20, which is fast approaching. However, the amnesty is only for the first buyer. The second buyer has to have documented money. Not many genuine buyers have ample white cash to do so. To ensure an exit strategy for investor, the end buyer needs to have availability of mortgage finance. Otherwise, not everyone would be interested in availing this amnesty. The other problem could be that builders may develop new projects to avail amnesty benefit themselves or they do it for the sleeping investors, but without the end buyer. This could result in ghost houses and ghettos. Nothing could be worse for the economy than creating dead lots of houses.

Copyright Business Recorder, 2020