TENS of thousands of people construct houses or buy apartments with their lifelong savings or with money borrowed from anywhere other than banks. Even a large number of professional land developers and builders do not have access to bank loans. Or else they avoid it.

As a result, construction activity —potentially one of the biggest job generator—remains least documented. The economy suffers in many ways —slower industrial expansion, low tax revenues, increasing number of jobless, deterioration in private investment etc.

Banks and development financial institutions (DFIs) currently cater to less than 35,000 active new and old housing finance borrowers. But they have to deal with a far higher number, about 55,000 cases where the money they lent is stuck up.

“But this is how a banker interprets it,” says a Karachi-based construction tycoon. “For us, it means that a single bank or DFI branch has never processed more than three and a half active housing finance applications (the number of bank branches is roughly 10,000). And each one is still sitting on five and a half cases of defaults—making no efforts to dispose them off and return to thousands of new loan seekers.”

It is hard to deny the demand for housing finance even during current sluggish economic growth. That’s because there is a backlog of some eight million housing units in the country. “People say this backlog keeps growing every year. That’s right. But a part of this backlog also clears year after year. The only reason you see the backlog growing on net basis is that the number of housing units built in a year is normally lower than the increase in demand for more units,” explains chief executive of another construction company.

Banks hardly make any effort to see who are the people or companies going for construction activity in a given year. Their executives keep cocooning in their cozy offices, cross-fingered, waiting for housing loan applications to pile up at the branch level. Unless approached by one influential quarter or the other, they don’t even bother to take such cases to credit appraisement and approval committees.

“On the branch level, petty officers either return applications that they say lack proper documentation. Or sometimes they discard the same as forwarding them up on the approval ladder becomes a futile exercise,” admits a mid-level housing finance official at a local bank.

Because of such practices, overall stock of housing finance has been on the decline after witnessing some growth till 2008. According to the latest SBP report, the stock of housing finance of all banks and DFIs (including House Building Finance Company) fell more than 10 per cent to Rs58 billion in March 2012 from Rs65 billion in March 2011.

This does not mean, however, that banks made no new loans at all. In just one quarter (January-March 2012), banks and DFIs lent Rs1.6 billion to 766 new borrowers. But almost half the number of fresh loan seekers, (48 per cent to be precise), were accommodated by HBFC, and all banks and DFIs together catered to the remaining 52 per cent.

“One needs to understand banks were allowed to re-start housing loans just nine years ago, in 2003 when they got permission to undertake leasing operations,” recalls a senior executive of HBL—one of the 27 banks engaged in housing finance business.

“And one must appreciate that between 2003 and 2008, in the first five years, bankers did a good job in building a new clientele of housing finance. But comes 2009 and you see some sluggishness in not only in this area but in other areas of bank lending as well. That has been because of a sharp increase in NPLs (non-performing loans) partly in effect of the global recession (that had slowed down Pakistan’s domestic growth as well) and partly because of imprudent lending by some big banks.”

Builders say lack of formal financing to housing sector continues to affect their business that denies thousands of construction workers jobs and blocking growth of about three dozen allied industries.

“We’ve stopped serving cancellation notices to defaulters of most of our housing schemes,” says Mr. Hafiz Butt, former chairman of the Association of Builders and Developers. “That’s what our clients are waiting for. People are just eager to get their booked projects cancelled because they don’t have money to pay the installments. The number of defaulters is growing so rapidly that if we start canceling their bookings, we’ll be broke. No institution is lending enough money to us or to individuals who have made investment in residential or commercial projects,” he said while talking to Dawn.

The SBP report notes that formal financing caters to just one or two per cent of the total demand for housing finance while informal lending accounts for another 10-12 per cent. One can assume that the remaining requirement for housing finance is either met by people through their own resources or it is never met, only to add to the backlog of housing units in the country. Informal lending, be it for financing construction of houses or apartments or for any other purpose, generally contributes to expansion in the size of our informal economy.

“Over the years we’ve been part of several initiatives, some supported by international financial lenders as well, to give boost to housing finance and exploit the potential of construction industry in overall economic expansion,” says Mr. Butt who has himself been a part of a SBP advisory committee formed for this purpose. But he laments that when it comes to implementing an initiative, every stakeholder begins to talk about what the other one must be doing instead of just contributing his bit sincerely.”

Real estate development industry suffers from “low public confidence” as the SBP report calls it, citing “absence of clear, uniform and fair business practices” as key reasons for financial institutions’ reluctance in providing development and construction finance.

But from credit seekers’ point of view what matters most is how regulators of financial sector ensure that banks and DFIs have the right systems in place to assess credit worthiness of a borrower.

“Besides, the SBP must also dissuade banks from being carried away by a surge in government demand for funds. Banks are making money just by investing in risk-free government papers so they don’t bother to see where else opportunities of viable lending exist,” said an executive member of ABAD.

That banks’ lust for government securities is denying credit to the private sector, according to the just-published key financials of banks. As of end-June 2012, at least one bank reported as low as 32 per cent advances-to-deposit ratio whereas for many banks it was slightly over 50 per cent.