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NEWS: Construction credit off-take takes off

 The construction amnesty scheme seems to be on the right track—for what it intended to do—ramp up construction which will immediately provide impetus to employment and manufacturing activity. That it is responding to the government plans is visible from not only cement and long steel production numbers over the past few months (read more: “Construction take-off: Saving grace”, Dec 18, 2020), but also from the credit being doled out by banks.

Credit off-take for residential and non-residential construction, as well as home loans has witnessed a substantial growth since August which remained more or less flat since Jul-19 with very few loans being added to the mix. September-20 seems to have breathed life into the sector—construction and home loans jumped to a new peak of Rs295 billion (this includes residential and non-residential building construction, home loans for consumers as well as bank employees). Drivers of this are construction loans, rather than home loans—which indicates that since most of the Naya Pakistan Housing projects (NPHP) are still in their very nascent stages, banks have not reached out to the mortgage segment too much. Numbers indicate that there is some growing activity in home loans for bank employees (less risky option) compared to home loans for consumers that have continued to be stagnant over months.

To be sure, many of the banks are mulling over the right product to offer consumers—likely developing internal risk assessment and underwriting mechanisms for a target market they are not entirely familiar with. This is under the NPHP for which there is not only a government mark-up subsidy scheme for end-borrowers but also a mandatory lending target for banks that they have to meet—5 percent of total private sector loans. The target itself is pretty lofty considering home loans are only about 1.4 percent of total private sector credit which has also dropped over the years from 2 percent. Over decades, the contributing share for mortgages has remained in a state of stasis with total credit outstanding never crossing the Rs100 billion mark.

That may change soon. Home loan numbers will have to start picking up, unless banks want to be non-compliant with SBP’s set targets. On the other hand, they will have to be very vigilant and have a lot of ground to cover given that the size of the mortgages under NPHP are much smaller, with a longer tenor and will likely cater to middle-income households which may be more difficult (read: riskier) to capture. But from the looks of it, they have time to get on the learning curve since most projects have only just begun the approval process. Mortgage demand, or rather applications, will catapult as projects are well and truly kicked off. Mortgage supply, we shall see.

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