The challenges of financing social housing – Journal
Over the past year, the government and the State Bank of Pakistan (SBP) have remained on their guard to remove bottlenecks that emerged in the process of implementing PTI’s flagship project “ Mera Pakistan Mera Garh ” (MPMG). And it is a continuous and continuous exercise.
Some features of the package of incentives offered to buyers, home builders, land developers and construction companies – such as tax amnesty and liberal tax benefits, easier access to bank finance and subsidized credit – were quickly revised and the corresponding deadlines were lengthened to eliminate the difficulties encountered by potential stakeholders.
Despite this dynamic approach, bank lending to targeted borrowers has yet to pick up as planned.
As of April 20, requests from citizens for funding of over Rs 52 billion had been received by banks under the Mera Pakistan Mera Ghar program. Of these, the banks have approved more than Rs 15 billion in funding to applicants deemed eligible for loans, while the other cases are at various stages of the assessment and approval process.
So far, risk averse banks do not appear to be enthusiastic about meeting the SBP’s target of the housing and construction finance portfolio, set at 5% of private sector credit by the end of the year. 2021.
Pakistan’s mortgage finance-to-GDP ratio of 0.23% is abnormally low compared to the South Asian average of 3.4%
Acknowledging the grievances of loan applications received by it, the SBP on April 30 ordered banks and development finance institutions to take appropriate action to resolve applicant complaints in a timely manner.
The complaints concerned exorbitant home loan processing fees, unusual delays in processing loan applications, and the lack of appropriate behavior by bank staff with customers. Even complaints filed on the SBP portal remain pending with banks for an unduly long time.
The SBP asked the banks to (a) rationalize the processing fees for financing, taking into account their actual costs and (b) provide applicants with the breakdown of these fees at the time of receipt of applications.
On April 30, SBP circular, banks and depository financial institutions were urged to set up an online electronic tracking mechanism and hotline to provide status and expected time for decision on an application at the customer’s request. In addition, they are required to issue an electronic tracking code to allow the applicant to check the status of their application and find out whether it has been approved or rejected.
In these difficult times, made more uncertain by the unpredictable pandemic, banks are generally very cautious in taking the risks implicit in any long-term loan. In the case of home loans for low income groups, they argue that most potential homeowners are not bankable because they have no credit / payment history.
Banks also want existing foreclosure laws to be changed so that they can repossess mortgaged property without going to court if borrowers default.
Traditionally, home loans from Pakistani banks have been a low priority and largely limited to less risky loans to higher income groups.
Analysts point out that Pakistan’s mortgage finance-to-GDP ratio of 0.23 percent is abnormally low compared to the South Asian average of 3.4 percent.
Banks prefer to grant less risky loans to large companies or finance wholesale trade. At present, the growth of bank interest income from loans is erratic and a large part of their profits comes from investments in government securities.
Judging by their performance so far, it appears that banks can only play a limited role in financing housing programs and related construction activities under the MPMG project.
Access to finance is not the only problem. Construction companies / developers would be reluctant to take risks in initiating MPMG projects unless they are assured of a confirmed demand.
In fact, accessibility for low-income groups to own their own homes is becoming the central issue. The prices of steel, cement, land, etc. have already exploded with a pickup in domestic demand.
Economists from the National University of Science and Technology, Abid Rehman and Muaz Ahmed, argue that a large portion of the income of the low-income group is spent on household spending, making the official mortgage program less affordable.
Double-digit food inflation and falling per capita income indicate that people’s standard of living is declining.
The Pakistan Bureau of Statistics reported on May 1 that food inflation rose from 11.5 percent in March to 15.7 percent in April in cities and simultaneously soared from 11.1 percent to 14.1 percent in cities. rural areas.
Due to the severe impact of Covid-19, the annual growth rate of GDP per capita will be negative by 0.2% in 2020-2021, preceded by a negative of 2.7% recorded last year, according to the report. Asian Development Outlook from the Asian Development Bank (ADB) just released.
The growth rate of GDP per capita was slightly positive in the first year of the PTI government.
To make Ravi’s urban housing project feasible, the authorities are trying to acquire land at a fixed rate, well below the prevailing market price. But there is strong opposition from farmers who ask for the market price or who do not want to sell their land. The market price of the land – a crucial factor for the low cost housing project – is expensive.
The State Bank and the Association of Pakistani Banks recently claimed that the banks’ housing and construction loan portfolio increased by Rs.54 billion from July to March from a stagnant position in the same period l ‘last year.
To quote a media report, the stock of home mortgages only increased by 13.7 billion rupees to 93.5 billion rupees. Taking into account the growth in the stock of housing construction advances to bank employees to the tune of Rs 25 billion, the total housing finance portfolio increases from Rs 38.8 billion to Rs 228 billion. . And construction loans to developers and builders of residential buildings only increased by 11 billion rupees.
The mortgage financing policy of the banks has been similar to that followed in the case of small and medium-sized enterprises (SMEs). “Credit is a critical challenge as commercial banks do not prioritize lending to SMEs, preferring to lend to public sector or large, low-risk companies instead,” the ADB Development Outlook report states.
In Pakistan, the 30% share of SMEs in GDP is much lower than in other low-income countries where it reaches 60% of GDP.
In many countries, banks play a key role in encouraging SMEs to expand their businesses and move into the formal sector.
The affordability of low-income groups to own housing depends primarily on their real income, which needs to be dramatically improved.
Posted in Dawn, The Business and Finance Weekly, May 10, 2021