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Incentive & penalty mechanism for banks to promote mortgage financing introduced

Building upon its earlier measure of setting a mandatory target for banks to extend mortgage loans and financing for developers and builders, the State Bank of Pakistan (SBP) has introduced a mechanism to incentivize meeting these targets.  The mechanism also penalizes the banks for any shortfall in meeting the target. 

According to this mechanism, commencing from December 31, 2020, 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 an increase in housing and construction finance from 30th June 2020 to the end of the relevant quarter.  This incentive, however, will be subject to a ceiling of 1% of the total demand and time liabilities based on which CRR is calculated. Further, the banks shall continue to maintain daily minimum CRR, which is currently at 3%.

Conversely, if the banks fail to meet the target, they will be penalized by requiring to maintain extra CRR by an amount equal to the 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. 

SBP expects that this incentive mechanism, through changes in the CRR structure, will result in banks increasing their emphasis on housing and construction finance.

Report by: The Truth International


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