State Bank announces new regulatory incentives

The State Bank of Pakistan (SBP) has announced five regulatory relaxations to incentivise banks to finance low-cost and affordable housing.

The move comes amid the central bank’s efforts to provide an enabling regulatory environment to promote housing and construction finance.

To support the provision of finance to this sector, the definition of low-cost housing finance used in current regulations for banks has been aligned with the definition used under the government mark-up subsidy facility for housing finance eligible under tiers one and two of housing finance.

Specifically, in the SBP regulations, the value of housing unit has been increased from Rs3 million to Rs3.5 million with maximum loan size increased from Rs2.7 million to Rs3.15 million.

Consequently, the incentive for low-cost housing finance will increase for banks as they will not only be able to enjoy mark-up subsidy facility of the government but also the regulatory incentives under low-cost housing finance of the SBP.

In order to facilitate financing for this segment, the SBP is urging banks to use alternative methods to identify income sources and assess creditworthiness of the borrower.

The second and third type of relaxation is being given to facilitate financing for this segment. Accordingly, under the second relaxation, banks have been exempted from the requirement of using ‘verifiable income’ for the purpose of calculating the debt burden ratio (DBR) in case of low-cost housing finance where banks are using income proxies and where income of borrower is not verifiable.

Thirdly, banks have also been exempted from the requirement of observing DBR, in case of low-cost housing finance, where banks are using repayment surrogates like rent, utility bills, telcos bills, etc to assess repayment capacity of borrower.

Hence, borrowers without verifiable or non-verifiable income will become eligible to avail low-cost housing finance.

Fourthly, banks have been exempted from the requirement of Internal Credit Risk Rating System for low-cost housing finance till September 30, 2022 as their current systems do not specifically cater for low cost housing finance.

Finally, in order to provide comfort to the borrowers who have liquid securities or already have a housing unit, banks have been allowed to extend housing finance for purchase/ construction of a residential property by accepting existing residential property or liquid securities in lieu of equity contribution for housing finance at the time of calculation of loan-to-value ratio.