SBP encourages banks to extend mortgage financing

Offers incentive to financial institutions who meet quarterly target of extending housing loans

The State Bank of Pakistan (SBP) has introduced a mechanism to incentivise banks to meet their mandatory targets with regard to extending mortgage loans and financing to developers and builders.

In a statement issued on Wednesday, the central bank pointed out that the mechanism also penalises banks for any shortfall in meeting the target. The move builds upon an earlier measure of the central bank where it set a mandatory target for banks for extending mortgage loans and financing to developers and builders, it said.

According to the mechanism, commencing from December 31, 2020, banks will be incentivised to maintain a reduced cash reserve requirement (CRR) with the SBP in the next quarter if they achieve the financing target for housing and construction set for the past quarter.

The amount of CRR to be maintained for the forthcoming quarter will be reduced by an amount equal to the increase in housing and construction finance from June 30, 2020 till the end of the relevant quarter.

“This incentive, however, will be subject to a ceiling of 1% of total demand and time liabilities based on which CRR is calculated,” the SBP said in the statement. “Furthermore, banks shall continue to maintain the daily minimum CRR, which is currently 3%.” Conversely, if banks fail to meet the target, they would be penalised and required to maintain an extra CRR by an amount equal to the shortfall in meeting the target.

It is pertinent to mention that banks do not earn any return on the CRR, the central bank said.

“Therefore, a decrease in the amount of CRR works as an incentive for banks whereas an increase in the amount of CRR serves as a penalty for banks,” it said.

The SBP reaffirmed that it has been actively working with banks to support financing for the promotion of housing and construction of building activities in the country.

Published in The Express Tribune, October 8^th, 2020.

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