Give out mortgage loans or pay a penalty, SBP tells banks

KARACHI: Under a new scheme, the State Bank of Pakistan is trying to incentivize banks to meet their mandatory targets to extend mortgage loans and financing for developers and builders, according to a statement released on Tuesday.

The mechanism also penalizes the banks for any shortfall in meeting the target.

According to the mechanism, which starts from December 31, 2020, banks will find an incentive of maintaining reduced Cash Reserve Requirement (CRR) with SBP, in the next quarter, in case they achieve or exceed the target of financing for housing and construction of buildings set for the quarter.

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

This incentive, however, will be subject to a ceiling of 1pc of the total demand and time liabilities based on which CRR is calculated. Further, the banks shall continue to maintain daily minimum CRR, which is currently at 3pc.

Conversely, if the banks fail to meet the target, they will be penalized by requiring maintaining an extra CRR by an amount equal to the shortage from the target.

As the SBP explained in its notice, banks do not earn any return on the amount of CRR maintained.

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

The apex bank had previously required banks to achieve mandatory targets, equivalent to 5pc of their domestic private sector credit by December 31, 2021, to finance housing and construction activities. Accordingly, quarterly targets from December 31, 2020 till December 31, 2021 have been agreed with the banks.

According to the central bank, the growth of the housing and construction sector is vital for the economy, due to its linkages with a number of allied industries and potential for job creation. Pakistan has a much lower private sector credit to GDP than many comparable countries.