Affordable Housing: "HBFC is an expert in the affordable housing segment"

Interview with Faisal Murad Head of Business and Operations, HBFC

The House Building Finance Company (HBFC) is the only specialized housing finance provider in Pakistan operating since 1952 and corporatized in 2007. With the incumbent government's grand mission to fill the housing gap in the country under the Naya Pakistan Housing Program (NPHP) and construct at least 5 million houses across cities and rural areas, mortgage and housing finance will have to play a pivotal role in making that happen. HBFC is in the thick of it and seems well-prepared to cater to the growing demand.

Here are excerpts from our interview with their Group Head, Business & Operations.

BR Research: Tell us about your product tailored for the NPHP.

Faisal Murad: The HBFC has been working on new products for over two years and it has picked up pace since the new government's mandate of building 5 million houses came to light. Last month, the SBP launched a government subsidy scheme.

The scheme makes it mandatory for all banks including HBFC, which is a Development Finance Institution (DFI) to lend in the mortgage segment. There are three levels or tiers of financing that would be made available under the scheme, with a maximum loan size of PKR 5 million on housing units with market value of up to PKR 6 million. The projects to be financed include those announced under Naya Pakistan Housing Development Authority (NAPHDA) as well as those undertaken by private builders and constructors.

BRR: What is the eligibility criteria for this mortgage financing scheme under the Government of Pakistan's mark-up subsidy? The SBP has not mandated or regulated any income or geographic criteria for subsidy recipients in the original notification.

FM: The basic aim of the program is to facilitate the low-income segment; developing eligibility criteria based on age, profession and other metrics, selecting the borrower, application process and the loan underwriting has been left on the discretion of financial institutions. Different financial institutions have different credit appetites; have their underwriting principles and an overall credit policy unique to them. There are no bounds on that by the SBP and rightfully so.

BRR: How is the HBFC positioned in the housing finance given that it is the only specialized institution in the country already catering to this segment?

FM: Housing finance is our forte and considering the current Government's focus on affordable housing, House Building Finance Company Limited will play a crucial role in the years ahead. HBFC has been serving the low and middle income segment since its inception. We understand this segment and have specialized data on their spending habits, income trends, household income dynamics, vulnerabilities, repayment behavior based on KIBOR changes, etc.

Housing finance industry at the moment is very small. There are about 60,000 borrowers and HBFC caters to about 40,000 of them; our loan ticket size is also small. Typically, banks have a small number of borrowers with large ticket size of high-profile customers with documented income. Catering to the housing finance needs of low and middle income segment for this subsidy scheme will be a challenge for them and where we would shine. Needless to say the entire financial industry will have to play a role in reaching the targets set forth under the program.

BRR: How is the progress so far? Is there an increased interest in mortgages since the announcement of NPHP and the subsidy scheme?

FM: Certainly. We are actively marketing our products and have been receiving an overwhelming response. Word of mouth also plays a significant role in marketing our housing finance schemes. Since the announcement of this scheme, we have been receiving increased traffic in our branches and we expect this traffic to increase further.

BRR: What's your current loan portfolio in terms of income brackets that HBFC has catered to?

FM: I can give you an example of our flagship product called "Ghar Pakistan Scheme" GPS. The broad parameter here is anybody with income of up to PKR 100,000 can be provided home financing of up to PKR 4.5 million for a period of up to 20 years. This is our main market. In the past year, 80 percent disbursement was in this income bracket.

Though the maximum loan under the scheme can go up to PKR 4.5 million, our average loan is about PKR 2 million with an average tenure of 11 years and mean income of PKR 65,000 per month.

This typically means that we have given a variety of loans where recipient incomes were less than PKR 100,000 or even less than PKR 50,000.

In fact, we have lent to individuals with incomes of PKR 25,000-30,000 as well but in such cases the average loan size was relatively small and either household income was considered or a guarantor was involved.

BRR: What is your current default ratio and has that changed since COVID-19?

FM: The product I have mentioned earlier was launched in Feb 2019. As of Dec-2019 about 10 months in, we closed 1,000 loans and there was zero default. This is a vulnerable segment and no non-performing loans' is a feat. But a major hit came after COVID-19. The segment does not have too many savings and many customers lost work partially or altogether, so it affected their monthly payments.

However, the trend is reversing again as the economy moves into revival.

BRR: The government wants to build 5 million houses. Is that a realistic target from the perspective of the banking sector and its ability to provide mortgages?

FM: I think, if we begin with, let's say, 100,000 houses per year and pace up as we move forward, this target can be achieved. Speaking about whether the industry has the capacity to achieve this target - I believe, it has. 100,000 houses multiplied by the average size of the loan, which is about PKR 2.0-2.2 million, is do-able for the industry.

Banks have ample liquidity, SBP is providing refinancing and they have a great outreach and geographic presence as well. HBFC also has a good funding source in the form of the Pakistan Mortgage Refinance Company (PMRC). So funding is not an issue here.

We need to look at the supply side, however. We should be concerned with customer education of housing finance avenues available and in return understanding the needs of the customer and the target market as financial institutions.

BRR: What is the graphic distribution today of HBFC's loan portfolio?

FM: Our customers are from across Pakistan. We have a strong presence in Khyber Pakhtunkhwa (KP) and Punjab as well as Gilgit-Baltistan (GB) and Azad Kashmir. In fact, 80 percent of last year's business was from upcountry.

BRR: What are some demand-side impediments that customers may have highlighted when it comes to housing finance?

FM: It is all about process and documentation which is a big challenge for new borrowers. In any other consumer product, transactions can occur in 5-7 days but with housing finance, there are a lot more engagements, frequent visits and documentation requirements. Collateral requirements are also stringent. Other common challenges include unclear property titles; unauthorized construction, incomplete/inconsistent building plans, etc. Issues like these jeopardize the loan approval process.

Copyright Business Recorder, 2020