AFTER a strong year in 2004 characterized by growing balance sheets and rising profits, banks are likely to strengthen further in 2005, largely through aggressive efforts to deploy excess liquidity in a range of products principally in the area of consumer financing. One of the fastest growing areas of business is expected to be mortgages where demand is seen as substantial regardless of high real estate prices.
The decision of the State Bank of Pakistan (SBP) last month to relax rules for housing finance by removing the Rs10 million per party lending limit is expected to fuel growth in mortgage lending even though its impact would be restricted to higher income groups who already have better access to housing finance products.
“This is one move in a series of moves to develop this sector,” says Amir Siddiqui, group head of retail banking at National Bank of Pakistan. “In the US, the stock of housing is 50 per cent of GDP and in Pakistan it is just one per cent so the potential is clearly there.”
The SBP began encouraging the mortgage business in recent years in a bid to make home ownership accessible for the middle class. This, the central bank did through various incentives and regulatory guidelines but so far, development of the business has been slow.
According to data from the SBP, by the end of 2004 banks had written mortgages worth Rs16.7 billion. “According to existing regulations, banks cannot lend more than 10 per cent of the total loan portfolio through mortgages,” says a director at the SBP who asked not to be named. “So far, no bank has broken this limit but once they do, we have told them that we will consider raising it.”
Bankers have only just begun to tiptoe into the mortgage business hoping to capture a slice of a growing market. They estimate that the country needs 500,000 new housing units a year of which only 300,000 are built, leaving an unfulfilled need for 200,000 units a year, which at an average price of Rs1 million per house amounts to Rs 200 billion worth mortgage financing needed every year.
“The market is big and wide open and no single bank can whet the appetite of demand,” says Abrar Ameen, head of home financing at Bank Al Falah which has booked Rs4 billion in mortgages and hopes to double the figure this year.
Then why the baby steps? For one, bankers have been climbing the learning curve for the last 12-18 months. They’ve spent most of the time building the infrastructure for this type of lending, training personnel and deploying sales teams.
In the meantime, they’ve wet their feet with top level customers to test the market. Then, rocketing real estate prices have discouraged aspiring home owners and put a dampener on the mortgage business and although prices eased this month as the stock market tumbled, this trend in property prices is seen as temporary.
“The major reason we could not reach our target of Rs3 billion to Rs4 billion in 2004 was high real estate prices,” says Zubina Sadick, head of consumer banking at Habib Bank which dispersed Rs1 billion in mortgages in 2004 and aims to raise this to Rs4.5 billion this year. “We generated a lot of queries but because rates were rising, we couldn’t convert them into loans.” The bank now hopes to make mortgages the largest segment of consumer lending after personal loans and auto financing.
Real estate brokers say that property prices are already out of the hands of middle class buyers, and despite the recent drop off as a result of default scandals, they don’t see a major trend change in the making.
“Buyers who had vanished will come back to the market because with that Rs10 million limit, they couldn’t buy anything because real estate prices have risen so rapidly,” says Zubair Shaheen, proprietor of Pak Estate, a real estate brokerage. In the last four years, house prices have risen ten times, he says, and have doubled over the last year.
Some bankers say high property prices also have a sunny side for the mortgage business. Over the last two years as rentals have risen, the gap between monthly rental payments and mortgage payments has narrowed to an average Rs15,000, giving renters more incentive to take out a mortgage. Part of the reason for this is also rising competition among banks which has taken mortgage rates down from about 14 per cent to 8.5 per cent over the last two years.
Experts worry though that while high property prices have left middle class borrowers out in the cold, the State Bank’s recent directive does little to help this category either.
The measure is seen as encouraging borrowing by higher income groups who can afford to borrow over Rs10 million. “Policies do tend to cater to the upper segment of the market,” says HBL’s Sadick. And not just those from the central bank. Banks too, have so far stuck to higher end clientele, hoping to test the nascent market with customers with the best credit.
While banks like Habib Bank may lend as little as Rs300,000 for a mortgage and finance loans in smaller cities like Sahiwal and Hyderabad, many others, foreign banks in particular tend not to lend less than Rs2 million to Rs3 million per customer, automatically excluding smaller borrowers.
Abn Amro, for example, has a mortgage portfolio of about Rs2 billion through 1,500 customers which it plans to increase by Rs300 million per month over the next year. Their average loan size is Rs2 million to Rs3 million. “We only lend at the top-end because we’re not a neighborhood bank,” says a top official of the bank.
National Bank of Pakistan, for one, hopes to pick up that slack. The state-owned bank disbursed mortgages worth Rs800 million last year to 1,500 clients in 14 cities and is targeting the lower and middle classes with an average loan size of Rs600,000, says NBP’s Siddiqui. It plans to lend to 10,000 people in 2005 and raise this to 20,000 borrowers a year three years from now by expanding the mortgage business from 40 to 150 branches, he adds.
But before that happens, several hurdles will first have to melt away. To start with, a more supportive judicial system will help by giving banks the cushion to become more aggressive lenders. While a foreclosure law is in place, the implementation of repossession has not yet been tested by banks.
“Foreclosure laws are there on paper but if you resort to paper-based vacate notices, it will be nothing more than a laughing matter,” says Bank Al-Falah’s Ameen. “The government needs to make sure there is recourse to court-base vacating.”
Second, the lack of adequate documentation also holds banks back. Bankers complain that each sector within each city has divergent systems and requirements which makes processing cumbersome and often impossible. News that the government plans to establish a computerized central registration network could help if concrete progress is made on this front.
“We prefer to lend against property in DHA because it’s secure and there are no titling issues,” says one banker. Bankers recommend that provincial governments hold market-based auctions to free up land and do this by agreeing to auction say 100 acres of land per district and require rates builders to construct within a fixed time frame or face forfeiture.
The State Bank has also asked local and provincial governments to establish housing schemes, satellite towns and land banks to help improve the supply of land “The demand is there so once supply is created then housing can stand on its feet,” says NBP’s Siddiqui.
Builders are also being encouraged to document and create asset-backed securities by obtaining ratings though the Pakistan Credit Rating Agency. Some bankers propose that a third party provide title insurance which would give banks an enforceable title. “This will make banks more liberal in lending and allow them to look just at the credit capacity of the customer,” says a banker at a large local bank.
Third, is the availability of data on individuals’ credit behaviour. Currently, banks can find out if a customer has ever defaulted on a payment of any kind but cannot find out a customer’s total leveraged position. Once the State Bank’s Credit Information Bureau comes into place later this year, this should improve.
Fourth, since land speculation has run rife, many now recommend that a real estate regulatory authority be set up monitor speculative activity and act as a regulator in a so-far unregulated market to improve credibility.
Fifth, the development by the government’s statistical bureau of a housing price index to measure property prices would improve the availability of credible information and allow bankers to countercheck quoted prices.
Bankers have also suggested that the State Bank raise the maximum tenure of the loan from 20 to 25 years. This, they argue, will improve social profiling in the country and help reduce the average age of borrowers from 42 to about 35.
As these issues are resolved, bankers made better equipped and the market adequately tested, experts see the mortgage business growing to Rs100 billion in the next three years. As the sector grows, bankers say, banks will have more at stake and will then exert more pressure on government authorities to resolve stumbling blocks as well.
