Banks are urging low-income people to take out heavily subsidised housing loans in quarter-page newspaper ads on a daily basis now.

Except the besotted 20-somethings who believe Imran Khan can simply will any miracle into existence at a time and place of his own choosing, few people thought the PTI government would actually roll out a massive housing scheme. No government, elected or otherwise, has had public housing on its priority agenda since the Bhutto administration in the 1970s.

The whole initiative is centred around the government’s conviction that banks have the capacity and willingness to generate hundreds of thousands of housing loans for low-income people. Newspaper ads show banks are playing along so far.

They are supposed to generate these loans at market rates, although the borrower will pay only a fraction of the real cost of funds. The government will pick up the rest of the tab through a subsidy. Yet the banks will have to carry the counter-party credit risk — albeit with a backstop guarantee of 40 per cent on the overall portfolio.

Given the passivity that our bankers are accustomed to, it seems unbelievable they will process millions of low-ticket mortgage applications mostly based on income proxies other than formal payslips.

They have never done that kind of hard work before — not even for less risky, high-ticket mortgages with clean land titles in upscale localities. In a country of 220 million people, the number of outstanding housing finance borrowers was merely 58,620 at the end of last year. Of that miniscule total, the number of loans generated by conventional and Islamic banks was only 17,100, according to the State Bank of Pakistan (SBP).

The initiative is centred around the government’s conviction that banks can generate hundreds of thousands of housing loans for low-income people

In fact, banks have disbursed almost 60pc of their Rs203.6 billion housing loan portfolio among their own employees.

So is this another Dam Fund–like exercise on part of the bankers to dish out flattery to someone hungry for it? Are they expected to keep feigning empathy for the poor only until the government changes or finds another pet project?

“The reason I feel highly optimistic is that it’s been a consultative and comprehensive process. We have set the minimum standards (for developers to qualify for subsidised lending). This is not a corporate social responsibility activity. The SBP has got a direct debit authority for the disbursal of the promised subsidy without intervention from the Ministry of Finance,” said Muhammad Aurangzeb, CEO of Habib Bank, Pakistan’s largest commercial bank with net assets of over Rs257bn. As chairman of the Pakistan Banks’ Association (PBA), he works closely with the newly established Naya Pakistan Housing Development Authority (Naphda).

“For the last three months, we have had a steering committee chaired by SBP Governor Reza Baqir. Naphda Chairman Lt Gen Anwar Ali Hyder also joins us every week. There are seven banks in that committee. It meets every Wednesday and about 16 meetings have taken place. We’re working on different work streams,” he told Dawn in a recent interview.

These work streams are about foreclosure laws, mortgage-backed securities, bankers’ capacity building, income proxies for low-income borrowers and, most importantly, developer’s risk acceptance criteria.

Until recently banks cited a poor foreclosure law as one reason for limited home loans. But the matter was settled for good recently when the Supreme Court allowed banks to auction the mortgaged property of a defaulter without obtaining a court order.

But above all, messy land titles and complexities involved in land transactions and no-objection certificates required from various civic agencies discouraged banks to take exposure to the housing market as an asset class.

“Banks along with the SBP, Naphda and the Association of Builders and Developers have come up with the developer’s risk acceptance criteria. Naphda’s presence is a welcome development. All these things were outside the scope of the banking industry. But now we are part of this. This means the ongoing process has complete ownership and buy-in,” Mr Aurangzeb said.

The fact that a quasi-regulatory body has framed the risk acceptance criteria for developers means that banks will now be a lot more comfortable in extending housing finance to projects that meet a minimum standard, he noted. The seal of approval by Naphda will mean all subsidised housing projects fulfil basic regulatory requirements and won’t blow up in one’s face.

“If a developer approaches us and passes the risk acceptance criteria, we will extend financing after due diligence. Why won’t we? I know this wasn’t the case before. But now it’s become an industry standard,” he said.

The SBP has asked all banks to increase their housing finance portfolio to 5pc of their domestic private-sector credit by the end of next year. Currently, it hovers around 3.4pc of total loans to the private sector.

According to Mr Aurangzeb, his bank will have to grow its housing finance portfolio by about Rs20bn or 100pc in the next year and a quarter. “It’s not going to be easy. We reached this level in so many years and now we have to double it by the end of 2021.”

In order to qualify for a subsidised loan, one has to be a first-time home buyer. They must come up with at least Rs800,000 on their own to buy a house of 125 square-yards or a flat of 850 square-feet. The most basic housing unit that the government is willing to subsidise under Naphda is supposed to cost Rs3.5 million (or less).

The prospective home buyer can go to any participating bank, tell them which Naphda-approved housing project they like and get financing of up to Rs2.7m for 20 years. They will pay the bank a monthly instalment of between Rs15,000 and Rs20,000 for the first five years when the interest rate will be five per cent. It will go up to 7pc for the next five years. The government has promised a subsidy of Rs33bn for the payment of mark-up over a period of 10 years along with an assurance to continue the facility afterwards.

HBL and other banks are helping Naphda in two subsidised housing projects in Lahore and Islamabad. Neither Naphda Chairman Lt Gen Anwar Ali Hyder nor Deputy Chairman Maj Gen Amer Aslam Khan responded to the repeated requests for comment.

Speaking to Dawn, economist Ammar H Khan raised doubts about the long-term viability of this initiative. “It’s impossible to find land in major cities to build homes at a price of Rs3.5m. The obstacle in setting up such schemes on city outskirts is the absence of lease,” he said in reference to suburban housing schemes like Bahria Town, which doesn’t receive home loans from any bank except the one set up by its own sponsors.

In addition, Mr Khan noted, builders use regular instalments from their customers as a source of liquidity. They build housing units on an incremental basis, ensuring their major expenditures coincide with the flow of instalments. Other than a few well-established names, banks won’t feel comfortable making a Rs2.7m payment to the developer of a housing society on behalf of a low-income borrower.

To address this problem, the PBA chairman said, the banking industry is scaling up its capacity to do bridge financing for developers. “Our skills are in end-user mortgage financing. Banks have hardly done any bridge or contractor financing. We’re training our corporate and investment banking people. The ideal structure will be to do project finance and its take-out is then generated from end-user mortgages. Their handshake is necessary,” he said.

Outstanding loans for construction amount to only Rs72.8bn, about 1.4pc of the total loans to private-sector businesses.

Talking to Dawn, Pakistan Institute of Development Economics Vice Chancellor Dr Nadeem ul Haque said the government should resist the temptation of subsidising housing loans for the poor. “The government should help the poor become part of the middle class. Handing out housing units to the poor won’t do them any good. At best, they’ll sell those units and move back to where they came from,” he said.

The only solution is to go for high-rise buildings in the centre of cities, he said. “A population of 220m can’t live in bungalows. You have to grow the cities vertically.”

In addition, he vehemently opposed the idea of subsidised housing finance. “There shouldn’t be any backstop guarantees. Otherwise, banks will hand out loans left, right and centre and then come to the government for a bailout. They have done that so many times and in so many countries.”

Published in Dawn, The Business and Finance Weekly, November 2nd, 2020