June 14, 2003	Saturday	Rabi-us-Sani 13, 1424

KARACHI, June 13: The State Bank has informed all banks that they can offer housing loans worth up to Rs7.5 million and their total exposure in housing finance can go up to 10 per cent of total advances.

The SBP also said in a letter issued to all banks on Friday that the minimum debt equity ratio for housing finance would be 80:20.

In July 2001 the SBP had set the maximum limit for housing finance at Rs5 million and permitted a 5 per cent exposure in this kind of financing. And it had prescribed the minimum debt equity ratio at 70:30.

The central bank has revised these limits in line with the concessions announced for the housing sector in the budget for fiscal year 2003-04.

The SBP letter says that the banks can now offer mortgage loans for housing up to 20 years. Earlier they were allowed to offer such loans for up to 15 years. The letter says that while offering these loans the banks would ensure matching of asset-liability — and that they can float long-term housing bonds of not less than 10 years maturity for this purpose.

It further says that the banks offering housing finances to their customers would ensure that the instalment of the loan being extended is commensurate with the cash flow and payment capacity of the borrower. “This measure would be in addition to banks’ usual evaluations of each proposal concerning credit worthiness of the borrowers as also the fact that the banks’ portfolio under housing finance fulfils the prudential norms and instructions issued by the State Bank and do not impair the soundness and safety of the bank itself.”

“Banks are encouraged to develop floating rate products for extending housing loans, thereby managing interest rate risk to avoid its adverse effects,” says the SBP letter.

“State Bank would also encourage banks to develop in-house system to stress test their housing portfolio against adverse movements in interest rates as also maturity mismatches.”

The SBP has informed the banks that the above guidelines on housing finance will become part of the Prudential Regulations for Consumer Finance which are being finalized and will be issued shortly.