KARACHI: The State Bank of Pakistan (SBP) on Friday announced five regulatory relaxations to incentivise banks for financing low-cost and affordable housing.

The central bank, which has already taken a series of measures to promote housing, has made it possible for the people having no formal income data to borrow for low-cost housing.

According to SBP, the definition of low cost housing finance used in the current regulations for banks has been aligned with definition used under Government Markup Subsidy Facility for Housing Finance eligible under Tiers I and II of housing finance. Specifically, in the SBP regulations, the value of housing unit has been increased from Rs3 million to Rs3.5m with maximum loan size increased from Rs2.7m to Rs3.15m.

Consequently, the incentive for low-cost housing finance will increase for banks as they will not only be able to enjoy markup subsidy facility by the government but the regulatory incentives under low cost housing finance by SBP as well.

Current regulations and banking practices require banks to obtain documentary evidence of income.

People with no formal income data can now borrow from banks

“In order to facilitate financing for this segment, the SBP is urging the banks to use alternate methods to identify income sources and assess the credit worthiness of the borrower,” said the report.

The 2nd and 3rd types of relaxations are being given to facilitate financing for this segment. Accordingly, under 2nd relaxation, banks have been exempted from the requirement of using ‘verifiable income’ for the purpose of calculating Debt Burden Ratio (DBR).

“Resultantly, borrowers with ‘non-verifiable income,’ estimated by banks using income proxies, will also become eligible to avail low cost housing finance,” said the SBP.

The banks have also been exempted from the requirement of observing DBR, in case of low cost housing finance, where banks are using repayment surrogates like rent, utility bills, telecommunications bills, etc. to assess repayment capacity of borrower.

“Borrowers without verifiable or non-verifiable income will become eligible to avail low cost housing finance,” said the report.

Further, the banks have been exempted from the requirement of Internal Credit Risk Rating System for the low cost housing finance till Sept 30, 2022 as their current systems do not specifically cater for low cost housing finance.

This time barred relaxation will provide banks to develop their Internal Credit Risk Rating Systems for low cost housing finance, said the SBP.

In addition to above relaxations, the said in order to provide comfort to the borrowers who have liquid securities or already have a housing unit, banks have been allowed to extend housing finance for purchase or construction of a residential property by accepting existing residential property or liquid securities in lieu of equity contribution for housing finance at the time of calculations of Loan to Value ratio.

The banks have already been given mandatory targets of 5 per cent of their private sector advances as housing and construction finance by Dec 31, 2021.

Published in Dawn, November 21st, 2020