June 28, 2003	Saturday	Rabi-us-Sani 27,1424

KARACHI, June 27: The State Bank’s third quarterly report released on Thursday give three indicators to show that labour-intensive construction industry has already been revived and activated.

“Although the data on construction sector value-added is not available yet, factors such as sale of steel products and cement, increasing financing by the House Building Finance Corporation for construction of houses and entry of commercial banks in this area during FY 03 indicate improvement in labour-intensive construction activities,” the report points out.

According to the data the sale and export of cement increased to 8.55 million tons in FY 03 from 7.06 million tons in 02. The sale of steel products went up to 906 thousand tons in 03 from 599 thousand tons in 02. The HBFC financing swelled to Rs491.7 million in 03 as against only Rs4.4 million in the year 02. Almost 76 per cent of HBFC financing goes in construction of new houses.

Improvement in demand has led to 9.1 per cent increase in production of basic metals during July 02 to March 03 as against a decline of 5.7 per cent in the same period of 01-02.

The Pakistan Steel drew down entire inventory, the production started picking up in third quarter of the current fiscal year. Pakistan Steel’s products are the inputs in many downstream industry. The SBP report, therefore, believes that a spurt in sales of steel products is an indicator of improvement in the overall activity in metal industry.

Cement industry in first three quarters of the current fiscal year showed 20.5 per cent increase in production as against a decline of 2.2 per cent in same period of previous year.

Other than improvement in construction activities, the failure to reach agreement regarding sale quotas spurred competition among cement manufacturers. Competition in North Zone brought a fall of Rs50 per bag in prices. Prices remained initially unchanged where competition was not as tough as was in North Zone. But when cement producers from North Zone intruded into South Zone, the prices came under pressure.

The SBP report estimates a rise of 75.2 per cent in capacity utilisation of cement industry in North during July 02 to March 03 while in South Zone the capacity utilization went up by 45.3 per cent. The overall increase in utilization of production capacity rose significantly to 66.9 per cent.

Earlier, in July last year the State Bank allowed the commercial banks to offer a maximum of Rs5 million housing finance loan for a maximum period of 15 years ensuring that a minimum debt equity ratio of 70 and 30 is maintained.

The SBP issued a circular immediately after the approval of a National Housing policy enhancing the maximum loan limit to Rs5 million from existing limit of Rs500,000.

Banks have been allowed to extend mortgage loans for construction of houses but would ensure matching of asset liability. For the purpose, the banks have been encouraged to float long-term housing bonds of not less than 10 years maturity.

In fact, banks would be encouraged to develop floating rate products for extending housing loans to manage interest rate risks to avoid its adverse effects. State Bank would also encourage banks to develop in-house system to stress test their housing portfolio against adverse movements in interest rates also maturity mismatches.

Care would be taken by the banks that instalments of loan extended by them for housing construction comensurates with the cash flow and payment capacity of the borrower. The banks will do the normal evaluation of the credit worthiness of the borrowers in respect of housing construction loan.

At the same time banks have been instructed to ensure that their housing finance portfolio complies with the State Bank’s prudential norms and instructions and in no way impair the soundness of the bank itself.

Therefore, the commercial banks have been instructed that at no time their total exposure to housing finance should not exceed 5 per cent of their net advances.