To be fair, a lot has broken ground on Naya Pakistan Housing Program (NPHP) than originally imagined by sceptics. Building 5 million houses is no joke, and conceivably, it is not possible to even accomplish such a mammoth target in only five years, but even a fraction of that would be a jumpstart for the housing sector. Supply is precious!
Of course, there is a ‘but’ coming, but first, let’s list down some important accomplishments under the program. One, the government announced a cash subsidy in July to cover a portion of the down-payment that customers will pay to purchase their first homes. This will cover 100,000 houses amounting to Rs30 billion (read more: “Naya Pakistan Housing: The plot thickens”, July 13, 2020).
Second, there is a mark-up facility which will reduce the monthly payment that households can pay on their mortgage leading the way to “affordable” housing (read more: “Housing- by chance”, Oct 14, 2020). Third, though the subsidy covers only 10 years, loan tenors can be extended up to 20 years due to the refinancing made available by the Pakistan Mortgage Refinance Company (PMRC).
Four, project approval timelines have been reduced to 30 working days, against the lengthy, cumbersome procedure that could go up to 2 years with multiple agency involvements and consequently many overlaps. To that end, the Naya Pakistan Housing Development Authority (NPHDA) has launched a monitoring system that would keep communication lines open with stakeholders and collaborative parties and ensure the projects stay on track, there is transparency and no untimely delays.
On the latest front, the State Bank announced a mandatory target for banks to maintain at least 5 percent of their private sector credit portfolio in housing finance. According to the SBP Financial Soundness data, mortgage loans are 1 percent of all the banking sector’s advances and only 16 percent of the consumer segment (auto loans occupy 38 percent of all consumer loans). This comes with a carrot of allowing banks to maintain a reduced cash reserve requirement (CRR) with the SBP.
Enter the grey area. The age-old question that has been repeatedly asked in this space is what is the eligibility criteria of this scheme? What does affordability mean for a Pakistani household? Who decides which family is more “deserving” of the subsidy than another? Rather unsurprisingly, though the SBP has mandated 5 percent housing loan maintenance for banks along with a tiered mark-up subsidy mechanism, the regulator has not provided any directions as to the recipient of these loans.
This is important for several reasons. This program has been advertised to cater to the “low-income” and “affordable” segment of the population that cannot afford to buy a home in this economy. By not providing an income-criteria and slapping a target on banks to maintain a 5 percent housing portfolio, there is no intelligent way to ensure the hefty subsidy will be utilized by a customer that actually deserves it.
At present, housing loans are offered by different banks at prevailing interest rates but these typically tend to be big ticker loans where titles are clear, the borrower has long existing relationship with the bank and has multiple immovable collateral against which the mortgage is taken out. Banks have a risk appetite for this or similar borrower. The target market for NPHP is entirely different.
But it will not be easy for banks to cater to this segment. Loan underwriting for many borrowers may prove difficult for lack of documentation and informal incomes; titles may not be clear to serve as adequate collateral; and without foreclosure laws, the bank will be in constant pressure to retrieve repayment while the borrower could default without losing the property.
Though the SBP mark-up scheme has restricted the maximum loan size to be Rs 5 million, it is upon the bank’s discretion to decide how many loans would be provided at what loan amount, and to whom. Since, it is not SBP’s target to increase the number of mortgage borrowers, banks have no motivation to explore the low-income segments which are problematic to understand and would require additional resources, manpower and a whole lot of homework.
Because the SBP has also not identified the different borrower categories or profiles for the mark-up subsidy; as such, banks are free to decide which income groups can avail the loan and the subsidy along with it.
Naturally, a first-time homeowner will have to be from the middle-class or lower income segment but the structure of the mark-up scheme itself does not make any such guarantees. Needless to say, while both the NPHP, and the SBP scheme have a target market in mind, neither can ensure that market would be tapped most efficiently. Given the subsidy is a scarce and limited resource, this is not the best way to go about implementing it.
With a gun to their head, it seems, the only mortgages that will gain eventual approval from banks would be those projects undertaken by NPHDA where the government is more involved (naturally these would concentrate in Punjab and north where the PTI holds ground), and to borrowers that are either government employees or salaried within the formal sector. The rest—the small business owners and workers in the informal and SME sector etc.—will have to find their own way back home.
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