Housing finance: SBP unveils mechanism for payment of markup subsidy

KARACHI: The State Bank of Pakistan (SBP) has announced a mechanism for payment of markup subsidy for housing finance for the banks/DFIs working as Executing Agencies (EAs).

Under the mechanism, the SBP has mentioned that in case of a loan becoming non-performing, no markup subsidy will be paid to banks.

In order to support the housing and construction sector, government of Pakistan is goving markup subsidy to provide concessional housing finance thereby promoting home ownership.

In this regard, mechanism for payment of markup subsidy for housing finance has been developed and is attached for the banks/DFIs working as Executing Agencies (EAs) for the subject facility.

The SBP has advised the EAs to submit their claims to Development Finance Support Department (DFSD), SBP BSC, Karachi as per payment mechanism within 15 working days from the end of each Quarter.

However, EAs will submit their claim within 15 working days for the quarter ending December 2020 and March 2021 from the date of issuance of this circular.

As per mechanism for payment of markup subsidies, payment of subsidy to EAs will be made through SBP’s operational arm viz. Development Finance Support Department (DFSD), SBP BSC, Head Office, Karachi.

EAs will prepare and submit claims on quarterly basis to DFSD for receiving government markup subsidy on outstanding principal amount of their performing housing finance portfolio up to expiry of each individual loan. In case of a loan becoming non-performing, no markup subsidy will be paid after being classified as ‘Loss’ as per SBP PRs for Housing Finance.

The EAs claims will contain particulars of each individual loan along with calculations of subsidy based on relevant 1-year KIBOR used. For the sake of simplicity, EAs will assign unique number to each loan i.e. “Bank Name - Loan Number” (ABC-12345678). The markup subsidy claim should be duly vetted by internal audit department of the EA.

The audited claim along with a certificate from EA relating to eligibility of borrowers for the subject scheme and correctness of the subsidy amount shall be submitted to DFSD within 15 working days after the end of respective quarter for payment of subsidy. The claims shall be submitted to DFSD.

DFSD, SBP BSC will scrutinize subsidy claim of EAs within 15 working days after receipt of complete information from EAs. DFSD shall ascertain that calculations of EAs subsidy claim are correct and applicable KIBOR has been used by the EAs.

Thereafter, DFSD will submit scrutinized claims to Accounts Department, SBP BSC for release of funds, through Karachi Office, to respective EA account maintained with SBP BSC, Karachi from Government account ‘Non-Food Account 1’. Banking Inspection Department of State Bank during regular inspection of the EAs shall conduct inspection of their housing finance portfolio on sampling basis using its own sampling techniques. SBP inspectors will randomly select credit files and review them from the perspective of eligibility of borrowers under the Program, status of loan (regular or NPL) and GOP subsidy claim.

The BID inspection report section on ‘Markup Subsidy on Housing Finance’ will be used as an important input for reviewing the Scheme and assessing its effectiveness in fulfilling the Government objective of promoting home ownership in the country.

As per procedure for loans disbursements and availing markup subsidy, EAs will evaluate financing applications of customers as per parameters of Markup Subsidy Scheme for Housing Finance approved by the Federal Cabinet and circulated by the State Bank of Pakistan to all banks/DFIs. The financing facility for a borrower will be sanctioned and disbursed by the EA after completion of documentation formalities. These financing will be entitled for markup subsidy as prescribed above. No further evaluation on eligibility of borrowers would be conducted by the State Bank of Pakistan.

For first five years Equally Monthly Installment (EMI) for Borrower, amortization schedule would be prepared for full tenor of financing at markup rate i.e. 3 percent, 5 percent or 7 percent depending upon the financing tier.

EMI for next five years i.e. 6th year to 10th year would be on the basis of amortization schedule prepared at the applicable subsidized markup rate (i.e. 5 percent, 7 percent or 9 percent depending upon the financing tier) on outstanding principal for remaining financing tenor. After 10th year of financing, EMI would be calculated on the basis of amortization schedule at applicable markup rate.

For calculation of markup subsidy for banks, after calculating the EMI for end user, the EAs will calculate the difference to be paid by Government of Pakistan by applying the difference between 1-Year KIBOR + spread and end user markup rate on the outstanding principal. The banks will calculate the subsidy for the period of markup subsidy i.e. 10 years.

It may be mentioned here that under the Scheme, loans are segregated into four tiers. Under the Tier 0 customer pricing will be 5% for first 5 years & 7% for next 5 years, while bank pricing will be 1 Year KIBOR + 700 bps.

Tier 1 customer pricing will be 3% for first 5 years & 5% for next 5 years, while bank pricing will be 1 Year KIBOR + 250 bps. For Tier 2, customer will pay 5% for first 5 years & 7% for next 5 years, while bank pricing will be 1 Year KIBOR + 400 bps (Spread may vary).

In addition, for Tier 3, customer price will be 7% for first 5 years & 9% for next 5 years, while bank pricing will be 1 Year KIBOR + 400 bps (Spread may vary). For loan tenors exceeding 10 years, market rate i.e. bank pricing will be applicable for the period exceeding 10 years.

Copyright Business Recorder, 2021