KARACHI, March 19: Banks can now lend as much money to a single borrower for construction of houses and apartments as they find feasible. The State Bank has told them that it has removed the per-party limit of Rs10 million for housing finance. The Banking Policy Department of the central bank issued a circular to all banks Development Finance Institutions (DFIs) on Friday informing them about its decision. The circular says banks and DFIs can now “determine housing finance limit in accordance with their internal credit policy, credit worthiness and loan repayment capacity of the borrowers.” But in so doing, the banks and DFIs will ensure that total monthly amortization payments of consumer loans, inclusive of housing loan does not exceed 50 per cent of the net disposable income of the prospective borrower. This means that under the relaxed rules any bank can lend any amount of money to its client for construction of a house or an apartment. But if a client is supposed to pay Rs1 million to a bank in one-month instalment of consumer loans including housing finance he has taken from the bank, his net disposable income should not be less than Rs2 million. The central bank has introduced this safeguard measure to ensure that the removal of per-party limit on housing finance does not lead to imprudent lending by banks resulting in growth of bad loans. The central bank has removed the per-party limit on housing finance to help banks balance their lending in various segments of consumer finance rather than focussing on car loans alone. The economy benefits far more from increased activity in construction industry, which feeds many other dependent industries, than from a pickup on automobile industry. More importantly, construction industry is the biggest employment generating industry and currently the government needs to generate new jobs immediately to reduce poverty levels.
During July-December 2004, banks disbursed Rs127.5 billion loans to the private sector. Of this Rs39 billion or 16 per cent went to consumer loans, but in that the share of automobile financing was Rs22.1 billion and that of housing finance only Rs8.6 billion —- or just 22 per cent of overall consumer loans. The removal of the per-party limit would enhance the share of housing finance in the pie of consumer financing.
The SBP circular says that whereas the banks and DFIs are now free to fix their own per-party limit for housing finance, they are supposed to observe certain rules laid down by the State Bank for this purpose. Top bankers say this means that banks/DFIs will have to comply with the following rules:
1. They will provide up to 85 per cent of the total cost of the proposed project in a housing finance scheme whereas the remaining 15 per cent will be arranged by the borrower.
2. They will offer mortgage loans for housing for up to 20 years but in doing so they will match their liabilities with the assets meaning that while offering long-term loans, they will ensure that they have long-term funds available with them.
3. They will introduce a mechanism to monitor conditions in the real estate market at least on quarterly basis to ensure that their policies are aligned to current market conditions.
4. They will develop floating rate products for housing finance to avoid taking a hit of interest rate risks.
Meanwhile, the State Bank has also relaxed rules for securitization of mortgage/ construction/ developer finance. The circular that conveyed to the banks the SBP decision of removing per-party limit on housing finance also reduced the minimum credit for banks/DFIs to make direct investment in Asset Backed Securities (ABS) from single A to single A minus or its equivalent.
The circular also allowed banks/DFIs to invest in non-listed mortgage/ construction/developer finance ABS having a minimum credit rating of single A minus or its equivalent.
