The non-performing loans (NPLs) under the head of house finance posted a surge of 19 percent, to Rs 18 billion, as on September 30, 2010 because of rising inflation and high interest rates.
According to the State Bank of Pakistan, after demonstrating a promising growth trend till 2008, the housing finance sector has been showing a declining trend, and total outstanding reported by banks and DFIs as on September 30, 2010 was Rs 68.60 billion as compared to Rs 76.66 billion on September 30, 2009, showing a decline of 10.51 percent.
At the same time, NPLs of house finance, as proportion of total outstanding, witnessed increasing trend over the last 12 months and it increased from Rs 15.26 billion (September 2009) to Rs 18.10 billion in September 2010, depicting an increase of 18.67 percent. House Building Finance Corporation's (HBFC) NPLs increased from Rs 6.48 billion to Rs 6.89 billion during the year, a 6.30 percent increase.
Although growth of HBFC's NPLs remained relatively low in absolute terms when compared to some of the other banking sectors, its percentage share in its total outstanding, however, was the greatest, as 48.95 percent of its total outstanding constituted NPLs. Excluding HBFC, NPLs for all banks and other DFIs increased by 27.81 percent over the year from Rs 8.77 billion to Rs 11.21 billion in September 2010.
The percentage share of NPLs that all banks and other DFIs constitute was 20.57 percent of their total outstanding portfolio, compared to a 14.43 percent as on September 30, 2009. Among banks, NPLs of foreign banks witnessed the sharpest increase of almost 60.20 percent during the year, from Rs 701 million to Rs 1.12 billion. Their NPLs constituted 25.14 percent of total outstanding, which was only 13.14 percent on September 30, 2009.
Similarly, with an increase of 35 percent NPLs of the Islamic banks increased from Rs 724 million to Rs 978 million. Private banks' NPLs increased by 24.67 percent, from Rs 6.21 billion to Rs 7.74 billion. NPLs of public sector banks increased from Rs 1.08 billion to Rs 1.27 billion, depicting a surge of 17.59 percent.
"Absence of sound governance structure within the housing developer industry creates lack of good practices, illegal construction, unreliable building permits", analysts said. The unstructured and unsupervised nature of business of real estate brokers/agencies is also a significant constraint to the provision of housing and housing finance, they said, adding that consequently, it is difficult for financial institutions to verify the character, capital, and capacity of potential clients.
Risk assessment and portfolio valuation is also fragile, which is another factor for the lenders' extreme caution. Therefore, financial institutions are reluctant to enter this market, which in turn causes scarcity of finance and constraints in the supply of housing in the country, they said. "Without using a strong regulatory authority to enforce corporate governance and allied standards for this stratum of business entrepreneurship, the quality of availability of housing facilities across population spectrum will not improve" they pointed out.
Similarly, during the period of September 2009 to September 2010 with a fall of 13.59 percent total number of outstanding borrowers also decreased from 115,959 to 100,214 since September 2009. Of the total outstanding, commercial banks accounted for Rs 54.16 billion, private banks reported Rs 32 billion, followed by public sector banks of Rs 8.93 billion, Islamic banks of Rs 8.76 billion and foreign banks with Rs 4.46 billion.
The outstanding loans of HBFC were Rs 14.08 billion; down by 11.02 percent over the last year. Other DFIs have a meager share of Rs 0.360 billion in outstanding loans. At present, 29 commercial banks, House Building Finance Company (HBFC) and one DFI are catering to housing finance needs. HBFC is the only specialised housing bank in the country, which has been providing housing finance to public since 1952.
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