KARACHI: The State Bank of Pakistan (SBP) has introduced incentive and penalty mechanism for banks to promote housing and construction financing.

According to this mechanism, a decrease in amount of Cash Reserve Requirement (CRR) works as an incentive for banks, whereas an increase in amount of CRR serves as a penalty for banks.

The State Bank has been actively engaged through policy interventions and proactive engagement with the banking industry to revitalize the credit flow to the housing and construction sector.

In order to enhance the flow of financing towards this sector, in July this year, all banks were advised to achieve mandatory targets equivalent to 5 percent of their domestic private sector credit by December 31, 2021, for financing to housing and construction of buildings (residential or otherwise). Accordingly, quarterly targets from December 31, 2020 to December 31, 2021 have been agreed with the banks.

The banks were also advised to develop time bound “Action Plan” with quarterly financing sub-targets, inter alia, to enable periodical monitoring of actual progress being made for achieving aforesaid mandatory

financing targets by the timeline prescribed thereof.

Now, in continuation of housing financing policy measures, the SBP has decided to prescribe some amendments in the instructions on the CRR with the aim to facilitate the banks to meet the mandatory financing targets.

According to this mechanism, commencing from December 31, 2020, banks will get an incentive of maintaining reduced Cash Reserve Requirement (CRR) with the 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 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 1 percent 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 3 percent.

Conversely, if the banks fail to meet the target, they will be penalized by requiring to maintain extra CRR by an amount equal to the shortage from the target. It would be pertinent to mention here that banks do not earn any return on the amount of CRR maintained.

Therefore, as per mechanism a decrease in amount of CRR works as an incentive for banks, whereas an increase in amount of CRR serves as a penalty for banks.

The housing finance and construction loans extended as a result of Balance Transfer from one bank to another will not be counted towards fulfilling mandatory advised targets of the acquiring bank for housing and construction finance. Consequently, such financing facilities will also not be eligible for lower CRR benefit as well.

According to SBP the adjustment in CRR will not be applicable to minimum daily requirement. Accordingly, both conventional banks and Islamic banks or Islamic banking branches will continue to maintain daily minimum CRR, which is currently at 3 percent.

SBP expects that this incentive mechanism, through changes in the CRR structure, will result in banks increasing their emphasis on housing and construction finance. SBP has been actively working with banks to support finance for the promotion of housing and construction of building activities in the country.

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 jobs creation and Pakistan has lower private sector credit to GDP than many comparable countries.

In addition, SBP will monitor the status of achievement of housing and construction finance targets of banks through housing and finance data, which are being embedded in the monthly statement on “Credit/Loans Classified by Borrowers” (A-07 Report) submitted by banks to the State Bank.—RIZWAN BHATTI