SBP introduces incentive, penalty mechanism to promote housing finance

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

According to a statement, the central bank will incentivise banks meeting mandatory targets of mortgage loans and financing for developers and builders and will also penalise them in case of any shortfall thereof.

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According to the mechanism that will come into force from December 31, 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 increase in housing and construction finance from June 30, 2020 to the end of the relevant quarter, the SBP said.

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

On the other hand, the central bank said, if banks fail to meet the target, they will be penalised by requiring to maintain extra CRR by an amount equal to a 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, 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.