The State Bank of Pakistan (SBP) has urged banks to use alternate methods to identify sources of income and assess the creditworthiness of borrowers trying to avail low-cost housing schemes.
The current regulations and banking practices require banks to obtain documentary evidence of income but the provision of this information is difficult mostly for people from low-income segments and for those who generate income from informal sources.
The incentive for low-cost housing finance will increase for banks as they will be able to enjoy both the markup subsidy facility by the government and the regulatory incentives under low-cost housing finance by the SBP.
SBP is striving to provide a conducive regulatory environment to promote housing and construction finance. This is a crucial sector with significant economic links to the other sectors of the economy, and the current level of credit provision in this sector is very low of less than 1 percent of the GDP which is much lower than that both in similar countries and in the region.
To support the provision of finance to this sector and especially to facilitate affordable housing, SBP has now announced five regulatory relaxations to incentivize banks to finance low cost and affordable housing. First, the definition of low-cost housing finance used in the current regulations for banks has been aligned with the definition used under the Government Markup Subsidy Facility for Housing Finance eligible under Tiers I and II of housing finance.
The value of the housing unit in the SBP regulations, in particular, has been increased from Rs. 3 million to Rs. 3.5 million while the maximum loan size has increased from Rs. 2.7 million to Rs. 3.15 million.
Accordingly, under the second relaxation, banks have been exempted from the requirement of using ‘verifiable income’ for the purpose of calculating the Debt Burden Ratio (DBR) in the case of low-cost housing finance where banks are using income proxies and where the income of the borrower is not verifiable. Consequently, borrowers with ‘non-verifiable income’ estimated by banks using income proxies will also become eligible to avail of low-cost housing finance.
Thirdly, banks have also been exempted from observing the DBR in the case of low-cost housing finance where they use repayment surrogates like rent, utility bills, and telcos bills, etc. to assess the repayment capacity of the borrower. Hence, borrowers without verifiable or non-verifiable income will be eligible to avail low-cost housing finance.
Fourthly, banks have been exempted from the requirement of the Internal Credit Risk Rating System for low-cost housing finance until 30 September 2022, as their current systems do not specifically cater to low-cost housing finance.
Therefore, borrowers of low-cost housing finance who cannot avail financing due to banks’ internal credit rating criteria will now become eligible for it if a bank is otherwise satisfied. This time-barred relaxation will allow banks to develop their Internal Credit Risk Rating Systems for low-cost housing finance.
Finally, in order to provide comfort to the borrowers who have liquid securities or already have a housing unit, banks have been allowed to extend housing finance for the purchase/construction of a residential property by accepting the existing residential property or liquid securities in lieu of an equity contribution for housing finance at the time of the calculations of the Loan to Value ratio.
The financing bank will create its lien on the existing residential property/liquid securities in addition to the mortgage of residential property being financed. It is expected that the above-mentioned regulatory incentives will spur the SBP’s ongoing efforts to accelerate housing and construction finance in Pakistan.
It is noteworthy that banks have already been given mandatory targets of 5 percent of their private-sector advances as housing and construction finance by 31 December 2021.