Challenges to PM's housing initiative

ARTICLE: The government-sponsored housing programmes/projects on easy terms with low interest rates are a good initiative to meet the housing shortfall. It is a move in the right direction to provide housing to people from low-income to moderate income groups. Provision of subsidy, for low cost apartments/houses will encourage buyers desperate in need of homes. As per the latest UN data, with annual birth rate swelling at 2.8% and population density shooting up beyond 280 people per square kilometre from 53 in 1955. The housing need has shot up by the same proportion.

News reports that Prime Minister Imran Khan has instructed banks to allocate 5% of their portfolios to the housing sector may not be enough to convince them to take credit risk on a verbal request. The government can ask the National Bank of Pakistan for its support and a couple of more banks may agree to join the bandwagon. Providing credit for housing is not as easy or simple for private banks. To get a sense, the proportion of housing loans given to consumers other than bank staff is a mere 1% of the total advances (Rs 8.2 trillion) which vividly exhibits that how selective and cautious banks are when it comes to funding for housing.

For a bank to make a shift in its lending policy, will require shareholders/boards of directors approval. Banking sector is already exposed, due to its investments in equity. On an average, bank investment in stocks ranges between 2% to 5% based on the size of its capital.

Though it may be encouraging from the borrower's perspective that they can obtain housing finance easily at lower markup rates on easy installments. But for a bank, offering a house loan is almost impossible without legal protection and proper documentation, which is a major issue. They will not be inclined to entertain customers without collateral or a government guarantee in writing.

Another major concern/confusion is the statement that until December 31, 2020 no questions will be asked about the source of income and investors are asked to avail tax incentive. Two days ago, 15 banks were penalized by SBP and a penalty of Rs 1.68 billion was imposed on them for violating rules pertaining to Customer Due Diligence, Know Your Customer, Terror Financing and AML. The amount of monetary penalty imposed on commercial banks since July 2019 until July 11 is Rs 3.26 billion. Does this mean that all transactions will be considered clean or state will deal with FATF if any objection is raised in future? And what about the SBP guarantee to banks that they will not be penalized until this period? Who is the guarantor over here?

Banks may have several types of reservations while providing credit. Normally banks are cautious and selective and offer loans in certain approved locations. The valuation is the key before lending is made after ascertaining validity of title and other documents.

Further, banks offer loans to taxpayers only after assessing the customer's creditworthiness. It will be difficult for banks to offer 15-20 or 25-year loan due to risk of default and period mismatch. And what if the government changes. Roughly, monthly principal plus markup could range between Rs 15.000 and above up to Rs 50.000/-.

More importantly, liquidity is the key: SBP since the last 12-years is regularly conducting Open Market Operations (OMO). Through Reverse Repo Injection and through Derivatives on an average it is injecting nearly Rs 1trillion. Against deposits of Rs 16.22 trillion, minus inter-bank and above one year deposit, 5% SLR is roughly Rs 725 billion. Government paper holding is Rs 7.888 trillion and currency in circulation is Rs 6.19 trillion. Hence, liquidity in real sense is clogged.

It is also important to understand that out of Rs 330 billion, land will be purchased and this amount will not be part of activity. This means around 40 allied industries will not be getting more than Rs 200 billion for construction activity if housing loan is fully utilized.

However, to generate liquidity, this writer has been writing since long to slash CRR. 1% (Rs 145 billion) or 2% cut will generate Rs 290 billion and the remaining amount can be offered through OMO injection. He has several times given proposals to reduce holdings of government paper, which is the easiest way to provide liquidity, as there is ample of room. Gradually bring it down to 35% to stimulate the economy.

It will never be easy to generate liquidity, unless SBP simultaneously widens the Interest Rate Corridor overnight Repo (Floor) rate by 250 to 300 bps below the SBP Policy Rate.

(The writer is former Country Treasurer of Chase Manhattan Bank)

Copyright Business Recorder, 2020