Banks’ reserve requirements: IMF urges govt to unwind measure taken by SBP

ISLAMABAD: The International Monetary Fund (IMF) has urged the government to unwind the measure taken by the State Bank of Pakistan allowing banks to lower their reserve requirements as an incentive for doubling to 5 percent the share of their lending portfolio to the housing and construction sectors out of concerns for financial stability and efficiency.

The IMF in the second to fifth review under the extended fund facility arrangement and request for rephasing of access released on Thursday noted that in July 2020, the SBP introduced mandatory targets on banks to double to 5 percent the share of their lending portfolio to the housing and construction sectors by December 2021 and as an incentive allowed compliant banks to lower their reserve requirements.

The Fund urged the authorities to unwind this measure out of concerns for financial stability and efficiency. Salient concerns include structural deficiencies in Pakistan, such as the: (i) lack of market participants’ capacity to manage risks; (ii) lack of a well-established yield curve for government bonds to guide mortgage prices; (iii) existence of financial inclusion gaps arising from weak credit information, technology, and enforcement mechanisms; (iv) lack of a workable legal and regulatory system (including a functional land registration and titling system, foreclosure system, and the availability of reliable data on household income/debt and property valuations); and (v) existence of distortive taxes which can encourage sales and underreporting of prices.

It noted that a direct and well-targeted budget subsidy programme for the vulnerable parts of the population would be a more effective way to achieve social policy objectives, and recommended stronger focus on addressing long-standing structural deficiencies to support private sector lending.

Pakistani authorities informed the Fund that to support the economic recovery and promote housing and construction sector, in July 2020 a mandatory targets was introduced on banks to support the sector. By December 2021, the SBP will require banks to provide 5 percent of their domestic private sector lending for the financing of housing and construction of buildings. To incentivize banks to meet the targets, the SBP has announced that banks achieving their quarterly targets will be permitted to lower their cash reserve requirements in the subsequent quarter.

“We see this as a temporary measure supporting private sector lending, which is low compared to peer countries and is hindering private sector growth, but recognize that further steps to improve the housing and construction sector - including an improved bankruptcy regime and more comprehensive property registry system—are necessary,” the Pakistan authorities insisted.

Copyright Business Recorder, 2021