State Bank of Pakistan – Prudential Regulations for housing finance

The Regulations in summary:

The “Housing Finance Prudential Regulations,” updated on April 18, 2017, by the State Bank of Pakistan, provides a structured framework to facilitate and regulate housing finance by banks and development finance institutions (DFIs). It emphasizes creating an enabling environment for housing sector growth while ensuring risk management and financial stability. Key highlights include:

1. House Financing Policies: Banks and DFIs must develop comprehensive policies outlining responsibilities, risk assessments, and internal controls tailored for housing finance.
2. Promotion of Housing Finance: Encourages the development of varied financial products, outreach to underserved regions, and integration of innovative technologies and marketing strategies.
3. Documentation and Transparency: Standardized, legally vetted documents are required, with clear disclosure of terms, fees, and conditions to borrowers.
4. Risk Management: Banks and DFIs must implement robust internal controls, manage asset-liability mismatches, and develop systems to monitor delinquency and portfolio performance.
5. Credit and Debt Regulations: Sets a maximum debt burden ratio of 50% and loan-to-value ratio of 85:15, ensuring sustainable borrower repayment capacity.
6. Monitoring and Verification: Mandates property verification, insurance coverage, and biannual market monitoring to align policies with market conditions.
7. Special Provisions: Includes rules for financing construction, renovations, and solar solutions, along with limits on exposure to the real estate sector and maximum financing tenor of 25 years.
8. Non-Performing Loans: Defines criteria for classification, provisioning, and rescheduling of housing finance, with safeguards to avoid misuse.

This document underscores the importance of balancing market growth with prudence and offers a comprehensive guide to fostering a stable and inclusive housing finance system in Pakistan.

For detailed reading, please visit: Housing finance regulations of SBP

Also visit: Prudential Regulations in Pakistan

General observations:

The following write-up on the above regulations can be found in

Revised Prudential Regulations for Housing Finance – Trade Chronicle, written by Mr. Siddiqi:

State Bank of Pakistan through a circular has informed Presidents / Chief Executives of Banks and DFIs that with the aim to further facilitate the promotion of Housing Finance, Prudential Regulations (PRs) for Housing Finance have been revised in consultation with the stakeholders. Accordingly, certain amendments have been made in the PRs which are as under:

i. Regulation HF-l(4): Development of Financing Documents: In addition to existing requirements, banks/DFls are further advised to obtain the thumb impression(s) along with the borrower’s signature(s) on financing and recourse documents. The banks/DFls are also encouraged to provide terms and conditions in Urdu language for better understanding of the customers and read out the same to the customers before finalizing the documentation process.

ii. Regulation HF-l(08): Information Disclosure: For the purpose of calculating the Annualized Percentage Rate, the number of days in a year has been changed to 365 days from 360 days.

iii. Regulation HF-l(11): Facilities to Related Persons: For the purpose of bringing clarity in the said regulation, amendment has been made that in case of resignation/separation/termination, staff housing finance should be monitored and serviced as commercial housing finance.

iv. Regulation HF-2: Types of Housing Finance: The said PR has been amended to the extent that the borrower can avail additional housing finance after the completion of two (02) years instead of three (03) years from the last date of disbursement. Moreover, the time to avail Balance Transfer Facility (BTF) in housing finance has also been reduced to eighteen (18) months from three (03) years.

News comments on the Regulations:

Daily the Business Recorder, on its Apr 19th, 2017, issue commented like this:

…. the properties valued up to Rs 3.0 million should not be subject to assessment by the evaluator. Banks/DFIs can use their internal resources to assess the properties having a market value of up to Rs 3.0 million. Banks/DFIs have been advised to ensure circulation of these regulations among all their offices/branches for meticulous compliance in letter and spirit. Non-compliance of PRs will lead to punitive action under the relevant provisions of Law, the central bank said. According to SBP, all other instructions on the subject shall remain unchanged and the transactions structured in a manner to circumvent these PRs will be tantamount to violations of PRs and will be dealt with accordingly.