The provision of banking loan is an essential component in low cost housing. Therefore among many incentives as a part of Construction Package 2020 given by the government last year, there was also a sizable subsidy and fixed markup rate to extend ease for affordable housing to the low-middle-income households. However a recent report by State Bank of Pakistan reveals the mortgage industry is still slow to pick up momentum, which is very disappointing and needs government’ attention.
Home financing is traditionally very meagre in Pakistan. The current level of credit provision in this sector is at very low level of nearly 0.5% of GDP which is much lower than in other similar countries and in the region. As India has increased the mortgage financing from less than 1% of its GDP to over 10% in the last 15 years.
Incentives for Home Financing
There is no denying making of foreclosure law is a great achievement of this government which enables banks vow to allocate Rs. 378 billion for housing construction till December 31, 2021 (now extended till December 31, 2022) for the first time. Subsidizing the low-cost housing, the government announced to give subsidies of Rs 30 billion for or the first 100,000 houses at the rate of Rs. 300,000 per house under the Naya Pakistan Housing Program. The government also fixed interest rate of 5% and 7% for five and 10 marla house respectively.
The SBP had issued a government mark-up subsidy for housing finance in last October to facilitate provision of subsidised financing to low and middle-income individuals. Also the central bank had given the banks targets to disburse at least 5% of their private sector loan portfolio for housing and construction.
However, tight standards and strict prerequisites for giving out such loans still remain a major constraint today, besides markup subsidy linked with low-cost residence has made it difficult for the borrowers to benefit from the scheme. On the other hand in spite of giving unprecedented incentives to real estate developers, the builder community in private sector has been unmoved to invest in incremental housing and focused only on upscale housing projects.
As in a news report a banker explains “Among other factors, there are supply side issues related to the availability of low-cost housing units in the market for the low-middle-income households the government wants to have their own houses or apartments. No builder or developer has so far shown interest in this segment because of the low price cap. Besides, the majority of the prospective borrowers are not bankable as they don’t have the kind of (income) profile or credit history to become eligible for a bank loan. So there is also a demand side impediment to the development of housing finance.”
Exploitation of Package
Another banker is of the opinion “The banks want protection against defaults to safeguard the interests of their depositors and shareholders, as well as litigation against them that last for years.”
However, it has been revealed that the banking loans have been largely misused. As according to the State Bank report, the Construction sector borrowed Rs 88 billion from banking institutions during the first half of the current fiscal year of 2020-21, showing 44% growth, as “the tax incentives and lower interest rate encouraged participation in real estate”. However further reading of the report discloses that out of Rs 88 billion, less than 46% i.e. Rs 41 billion were borrowed for residential sector while Rs. 47 billion by non-residential sector.
Time is running out, therefore government must look into these matters immediately. Otherwise their flagship housing program would soon get defaulted itself.