Challenges in the financing of low-cost housing

Published May 10, 2021
Notwithstanding this dynamic approach, bank lending to targeted borrowers has yet to pick up as expected. — File
Notwithstanding this dynamic approach, bank lending to targeted borrowers has yet to pick up as expected. — File

Over the past year, the government and the State Bank of Pakistan (SBP) have remained on their toes to remove bottlenecks that surfaced in the process of implementation of PTI’s flagship ‘Mera Pakistan Mera Garh’ (MPMG) project. And it is an ongoing, continuing exercise.

Some features of incentives package offered to buyers, house builders, land developers and construction companies — such as tax amnesty and liberal tax concessions, easier access to bank finance and subsidised credit — have been quickly revised and related deadlines extended to remove difficulties faced by the potential stakeholders.

Notwithstanding this dynamic approach, bank lending to targeted borrowers has yet to pick up as expected.

As of April 20, applications from citizens for the financing of more than Rs52 billion have been received by banks under the Mera Pakistan Mera Ghar scheme. Of these, banks have approved financing of over Rs15bn to applicants considered eligible for loans while the remaining cases are stated to be in the different stages of the evaluation and approval process.

So far, risk-averse banks do not seem enthusiastic about achieving the SBP target of housing and construction finance portfolio, set at 5 per cent of the private sector credit by end of 2021.

Pakistan’s mortgage finance to GDP ratio at 0.23pc is abnormally low compared to the South Asian average of 3.4pc

Taking notice of the grievances of loan applications received by it, the SBP, on April 30, directed banks and development financial institutions to take appropriate measures to resolve applicants’ complaints on a timely basis.

The complaints related to exorbitant housing loan processing fee, unusual delay in loan application processing and the lack of appropriate behaviour of banks’ staff with customers. Even the complaints lodged on the SBP’s portal remain pending with banks for an unduly long time.

The SBP has asked the banks (a) to rationalise the processing fee for financing, considering their actual costs and (b) to provide applicants with the break-up of these charges at the time of receipt of applications.

By April 30, SBP circular, the banks and depository financial institutions have been directed to set up an online e-tracking mechanism and a phone-based helpline to provide the status and expected time required for the decision on an application on customer’s query. Further, they are required to issue an e-tracking code to enable the applicant to check the status of his application and know whether it has been approved or rejected.

In these distressing times, made more uncertain by the unpredictable pandemic, the banks generally are very cautious in taking risks implicit in any long-term loans. In the case of housing loans for low-income groups, they argue that most potential homeowners are not bankable as they lack a credit/payment history.

Banks also want changes in the existing foreclosure laws to be able to repossess mortgaged property without recourse to courts in the case of default by borrowers.

Traditionally, housing loans by Pakistani banks have been a low priority and largely restricted to less risky lending to higher income group.

Analysts point out that Pakistan’s mortgage finance to GDP ratio at 0.23pc is abnormally low as compared to the South Asian average of 3.4pc.

Banks prefer to extend less risky loans to large corporate enterprises or finance big trade. Currently, the growth in bank interest incomes from loans is erratic and much of their profits come from investments in government securities.

Going by their performance so far, it seems that banks can only a play limited role in financing housing schemes and related construction activities under the MPMG project.

Access to finance is not the only problem. Construction companies/developers are reportedly reluctant to take risks in initiating MPMG projects unless they are assured of confirmed demand.

In fact, the affordability of low-income group to own their own homes is becoming the core issue. Prices of steel, cement, land etc have already shot up with a pickup in domestic demand.

National University of Sciences and Technology economists Abid Rehman and Muaz Ahmed argue that much of the low-income group’s earnings are spent on household expenditure, making the official mortgage programme less affordable.

The double-digit food inflation rate and declining per capita income indicate that the standard of living of people is falling.

The Pakistan Bureau of Statistics reported on May 1 that food inflation jumped from 11.5pc in March to 15.7pc in April in cities and simultaneously shot up from 11.1pc to 14.1pc in rural areas.

Owing to the severe Covid-19 impact, the annual GDP growth rate per capita will be negative 0.2pc in 2020-21, preceded by negative 2.7pc recorded last year, according to Asian Development Bank’s (ADB) Asian Development Outlook report just released.

The per capita GDP growth rate was slightly positive in the first year of the PTI government.

To make Ravi urban housing project feasible, the authorities are trying to acquire land at a fixed rate, much below the prevailing market price. But there is stiff opposition from farmers who are either demanding the market price or not willing to sell their land. The market price of land — a crucial factor for the low-cost housing project — is expensive.

The State Bank and the Pakistan Banks Association have recently claimed that the housing and construction loan portfolio of banks has grown by Rs54bn from July to March compared to a stagnant position in the same period last year.

To quote a media report, the stock of mortgage finance to individuals has increased by just Rs13.7bn to Rs93.5bn. If the growth of the stock of house building advances to bank employees at Rs25bn is taken into consideration, the total housing finance portfolio goes up by Rs38.8bn to Rs228bn. And loans for construction to developers and builders for residential buildings have grown by a mere Rs11bn.

The banks’ mortgage financing policy has been similar to that they follow in the case of small- and medium-sized enterprises (SMEs.) “Credit is a crucial challenge as commercial banks do not prioritise lending to SMEs, preferring to lend instead to the public sector or to large-low risk enterprises,” says the ADB Development Outlook report.

In Pakistan, the SMEs’ share of 30pc in GDP is much smaller than in other low-income countries where it reaches 60pc of the GDP.

In many countries, banks play a vital role in making SMEs grow their business and shift to the formal sector.

The affordability of low-income group to own housing units depends primarily on their real income that needs to be radically improved.

Published in Dawn, The Business and Finance Weekly, May 10th, 2021

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