The State Bank of Pakistan (SBP) has comprehensively reviewed and updated its Prudential Regulations for Housing Finance, introducing a revised framework that covers housing loans, property financing, repayment capacity, documentation, insurance, asset classification and restructuring. The central bank said the regulations were updated after considering the current dynamics of the housing finance sector. The revised requirements have taken immediate effect, with banks and Development Finance Institutions (DFIs) directed to ensure compliance with the updated framework.
The revised regulations supersede 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. The updated framework sets out the conditions under which banks and DFIs can provide housing finance and establishes requirements covering the complete financing process, from assessment of borrowers and properties to repayment, documentation and treatment of overdue facilities.
Under the new framework, housing finance can be extended for several purposes. These include the purchase of a house or apartment, construction of a house on an owned plot, purchase of a plot together with construction, extension or expansion of an existing house, renovation and installation of renewable energy solutions in housing units. The maximum tenor for housing finance has been set at 30 years, while financing for renewable energy solutions carries a maximum tenor of 10 years.
The revised regulations also establish a maximum Loan to Value (LTV) ratio of 90:10. Banks and DFIs must additionally ensure that total monthly amortization payments for the housing finance facility being considered, together with all other outstanding consumer financing obligations of the borrower, do not exceed 65% of the borrower’s net disposable income. The requirement places a defined limit on the overall repayment burden that can be carried by a housing finance customer.
For borrowers earning informal income, banks and DFIs have been instructed to use informal income estimation, or proxy, models circulated by the Pakistan Banks’ Association (PBA). The requirement provides financial institutions with a prescribed approach for assessing the income and repayment capacity of customers whose earnings may not be supported through conventional formal employment or business documentation.
The revised framework also includes specific provisions for property security on smaller housing finance facilities. For financing of up to Rs5 million, banks and DFIs may extend loans by marking a lien on the property. This provision includes 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 financing exceeding Rs10 million, property assessment by a valuator from the PBA panel has been made mandatory. The requirement introduces a standardized valuation process for larger housing finance exposures. Banks and DFIs have also been directed to obtain comprehensive insurance or takaful coverage for the financed housing unit, providing coverage for the property financed through the facility.
Documentation requirements have also been revised. Banks and DFIs are required to use standardized financing documents circulated by the PBA. The framework permits digital signatures on these documents, provided they are verified through a one time password or another form of two factor authentication. This allows the housing finance documentation process to incorporate digital verification mechanisms while maintaining an authentication requirement.
The SBP has also introduced a four tier framework for the classification of housing finance assets. The categories are OAEM, Substandard, Doubtful and Loss, with classification based on overdue periods of 90 days, 180 days, one year and two years, respectively. Provisioning requirements are to be determined using IFRS 9 Expected Credit Loss calculations or Forced Sale Value based calculations, whichever is higher.
The regulations further provide that the Forced Sale Value benefit will cease after five years from the date on which the asset is classified. This establishes a defined period for the application of the relevant Forced Sale Value benefit when calculating provisioning requirements for classified housing finance facilities.
Rules governing rescheduling and restructuring have also been specified under the revised framework. Housing finance may be rescheduled or restructured only once during any two year period. Any extension of the financing tenure resulting from restructuring is limited to five years, while the overall tenure must remain within the maximum 30 year ceiling established by the regulations.
The updated rules also require banks and DFIs to introduce simplified and standardized loan application forms for different categories of borrowers. Separate forms are to be available for formal salaried individuals, formal businesses and persons earning informal income. The forms must be made available in both physical and digital formats and provided in Urdu and English.
The revised housing finance framework represents a broad update to the rules governing residential financing by banks and DFIs. Alongside the 30 year maximum tenor, the framework establishes limits on borrower repayment obligations, introduces requirements for informal income assessment and property valuation, strengthens documentation and insurance requirements, and sets specific rules for asset classification and restructuring. The regulations are applicable with immediate effect, requiring banks and DFIs to align their housing finance operations with the updated requirements.
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