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Rs 15 billion market remains mostly untapped
GoP should encourage the private sector to establish HFCs

By SHABBIR H. KAZMI
July 08 - 14, 2002

Construction industry alone provides impetus to over 42 other industries. As the GoP aims at alleviating poverty and improving revenue collection, a focused attention to this industry can help in achieving both the objectives. On the one hand it has the potential to offer new job opportunities and, on the other hand, enhance revenue collection from other industries. However, the twin objectives cannot be achieved without addressing the problems facing the housing finance comapnies (HFCs).

According to construction industry experts, housing finance is a Rs 15 billion per annum market which has remained mostly untapped due to non-availability of long-term funds, higher interest rate and inadequate legal framework. For a considerably long time there was only one institution, House Building Finance Corporation (HBFC) trying hard to cater the huge demand for funds. It also faced serious problems in the past and, at one stage, stopped disbursement of fresh loans.

Another company, International Housing Finance Limited (IFHL) was established in the private sector in early nineties with the help of International Finance Corporation (IFC), Commonwealth Development Corporation (CDC) and Crescent Group. Both IFC and CDC not only participated in equity but also provided credit lines. However, there remains a huge accumulated demand for funds.

State Bank of Pakistan (SBP) also received a credit line as back as in 1994 but funds could not be disbursed because of the conditionalities linked to this credit line. The reason being that SBP has been insisting on a maximum interest rate for borrowers which was not workable for the HFCs. According to industry sources SBP offered the fund at 8.5 per cent per annum to HFCs and insisted that it should be lent onwards at 10.5 per cent. The spread was not considered sufficient by the HFCs.

The two key issues which do not allow the HFCs to operate in the desired manner are: non-availability of long-term funds and inadequate legal framework to repossess the property, in case of default. As regard the first problem, there can be an option of flotation of long-term credit instruments, similar to TFCs. However, it is considered a limited option due to poor savings rate in the country and unwillingness of depositors and/or investors to make any long-term commitment.

As regards the prevailing legal framework, there are two opinions: 1) there are reasonably sufficient laws, but the speed at which the process moves is too slow. Most of the defaulters fall under the category of wilful defaulters who take the maximum advantage of the weak system. As a result HFCs face two problems: 1) long years of litigation and huge legal expenditure and 2) liquidity crunch, which does not allow them to make fresh disbursements. Therefore, there is need to further improvise the laws and ensure speedy decision making by the courts.

It is clear that HBFC and IHFL are not in a position to meet the entire demand for housing finance. Lately, some banks have ventured into this area but are focusing only a small segment, mainly the employees of corporate sector. The basic advantage is that their employer become a pseudo guarantee or take the responsibility of remitting the collection from the salary of employees. However, the total housing finance market size is very large and comprises of many segments. Even if the banks succeed in taking care of needs of corporate employees, it is only a very small percentage of the total market.

OUTLOOK

As the GoP is following the policy of privatization, sooner or later HBFC will also has to be transferred to the private sector. Therefore, in the meantime the GoP should encourage the private sector to establish HFCs. The HFCs should not depend solely on the central bank as the source of fund and consider issue of TFCs as a possible way out.

An important area which needs the most attention is promulgation of adequate foreclosure laws. It is a must that the properties of habitual defaulters should be repossessed because unless forfeitures are at large scale, borrowers will not change their habits.

Saying this much, there should also be a rescue plan for those who face real hardship and are unable to discharge their liability. This, in no way, suggests writing-off loans. The HFCs must create some endowment out of which liability of such cases can be settled.

The GoP should also follow a multi tier policy: 1) offering incentive for owning the house, 2) inculcating saving habits and 2) restoring confidence of people in financial institutions. Lately, the central bank has been taking remedial measures to rescue financial institutions in trouble. However, there is a need to develop and implement fool-proof systems to control problem in-making rather than doing the job of fire fighters.