The State Bank of Pakistan (SBP) has comprehensively revised its Prudential Regulations for Housing Finance, introducing an updated regulatory framework that sets new requirements for banks and Development Finance Institutions (DFIs) operating in the housing finance segment. The central bank said the regulations have been reviewed in light of the current dynamics of Pakistan’s housing finance sector and will take effect immediately.
The revised framework supersedes several previous instructions, including IH&SMEFD Circular Letter No. 8 of 2019, IH&SMEFD Circular No. 12 of 2020, IH&SMEFD Circular No. 13 of 2020 and IH&SMEFD Circular No. 07 of 2021. Banks and DFIs have been advised to ensure meticulous compliance with the updated regulations as they begin applying the new requirements to housing finance facilities.
Under the revised rules, housing finance can be provided for a wider range of housing related purposes. Eligible financing includes the purchase of a house or apartment, construction of a house on an owned plot, purchase of a plot along with construction, extension or expansion of an existing house, renovation and installation of renewable energy solutions in housing units. The maximum tenor for standard housing finance has been fixed at 30 years, while financing specifically provided for renewable energy solutions will have a maximum tenor of 10 years.
The revised framework also sets the maximum Loan to Value (LTV) ratio at 90:10. In addition, banks and DFIs must ensure that the borrower’s total monthly amortization payments, including the housing finance under consideration and all other outstanding consumer financing obligations, do not exceed 65% of the borrower’s net disposable income. The requirement is intended to ensure that housing finance repayments remain within the borrower’s repayment capacity.
For borrowers earning informal income, banks and DFIs have been directed to use informal income estimation, or proxy, models circulated by the Pakistan Banks’ Association (PBA). This requirement provides institutions with a standardized approach for assessing the repayment capacity of customers whose income may not be supported through conventional formal documentation.
The regulations also introduce specific provisions concerning property security for smaller financing amounts. For housing finance of up to Rs5 million, banks and DFIs may extend loans by marking a lien on the property. This provision also covers properties supported by a Green Property Certificate issued by the Punjab Land Records Authority or an equivalent certificate issued by the relevant provincial authority.
For larger financing facilities, additional property assessment requirements have been introduced. Property assessment by a valuator from the PBA panel has been made mandatory for housing finance exceeding Rs10 million. Banks and DFIs have also been instructed to obtain comprehensive insurance or takaful coverage for the financed housing unit, providing additional protection in connection with the financed property.
The revised rules further require banks and DFIs to use standardized housing finance documents circulated by the PBA. These documents can incorporate digital signatures, provided that the signatures are verified through one time passwords or other forms of two factor authentication. This requirement introduces a standardized digital verification mechanism alongside the documentation process for housing finance.
The SBP has also revised requirements relating to asset classification and provisioning. Housing finance assets will be classified under a four tier framework consisting of OAEM, Substandard, Doubtful and Loss categories. The classification will be based on overdue periods of 90 days, 180 days, one year and two years respectively. Provisioning requirements will be benchmarked against IFRS 9 Expected Credit Loss calculations or Forced Sale Value based calculations, whichever is higher.
The regulations further state that the benefit associated with Forced Sale Value will cease after five years from the date of classification. This establishes a defined period for institutions to recognize the relevant benefit when determining provisioning requirements for classified housing finance assets.
Rescheduling and restructuring of housing finance has also been addressed under the revised framework. Banks and DFIs may reschedule or restructure housing finance only once within any two year period. Any resulting extension in tenure is capped at five years, while the overall maximum housing finance tenor remains subject to the 30 year ceiling.
The revised regulations additionally require banks and DFIs to adopt simplified and standardized loan application forms for formal salaried individuals, formal businesses and informal income borrowers. These application forms are to be made available in both physical and digital formats and provided in Urdu and English.
The updated framework represents a broad revision of the regulatory requirements governing housing finance, covering financing purposes, repayment capacity, property assessment, documentation, insurance, digital verification, asset classification and restructuring. With immediate implementation, banks and DFIs will now be required to align their housing finance operations with the revised requirements and the newly established 30 year maximum tenor.
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