KARACHI, Oct 5: The State Bank has stopped banks from providing housing loans exclusively for the purchase of land and urged them to offer housing finance for buying land only for construction on it.
The SBP also asked banks and development finance institutions (DFIs) to give housing finance in tranches -- up to 50 per cent for purchase of land and the rest for construction on it. The move is apparently aimed at curbing speculation in real estate and checking the resultant rise in inflation.
"Banks/DFIs will not allow housing finance purely for the purchase of land/plots; rather, such financing would be extended for the purchase of land/plot and construction on it," the SBP said in a circular on issued Tuesday.
The circular advised banks and DFIs that they should evaluate housing loans on the basis of borrower's repayment capacity, value of land/plot and the cost of construction and it should be disbursed in tranches.
This condition has been part of the regulations for housing finance, but now the SBP seems set to get it implemented. Bankers say the central bank has emphasized on it to let the market know that it is getting serious about the issue.
They admit that some of them have made loans in the past for the purchase of land only without bothering to know whether the land bought out of the borrowed money is being used for construction or just being held to be sold at a higher price.
This has been happening in the backdrop of banks wallowing in excess liquidity and people looking for profitable areas of investment after a dramatic fall in banks' interest rates and lowering of returns on the National Saving Schemes (NSS).
A recent Dawn survey found that the prices of land in posh Defence area went up by 45-100 per cent within nine months to September 2004. Real estate brokers say speculators outnumber genuine buyers. This has contributed to creation of an asset price bubble and fuelled inflation.
Year-on-year inflation in July-August 2004 was 9.29 per cent. The target for inflation is five per cent for the fiscal year ending June 2005, but it may reach six per cent or even beyond that because of booming oil prices and short supply of farm products like wheat. The present water crisis threatens to create further shortage of food items with consequent increase in inflation.
PERSONAL LOANS: The SBP has raised limits for personal loans and credit card financing up to Rs2 million for such customers of the banks and DFIs who have "extraordinary, strong repayment capacity, moderate debt burden and a clean track record".
The bankers say this will help them make larger personal loans and thus boost consumer spending. But the central bank has warned banks and DFIs that they should not exceed the previous limit of Rs500,000 set for personal loans and credit cards if these loans are unsecured in nature.
Pakistan is banking a lot on higher consumer spending to achieve an economic growth target of 6.6 per cent during this fiscal year, up from the last year's estimated growth of 6.4 per cent.
A two-pronged move made by the central bank to check misuse of housing loans for speculation in real estate and to liberalize personal loans and credit card financing limits kills two birds with one stone: it aims at checking inflation and also seeks to accelerate economic growth at the same time.