SBP Amendment Act #14: Housing and CRR
SBP will continue to engage in activities in gross violation of SBP Act and has no intention of correcting its behaviour
I should have started numbering the posts earlier but I never expected this substack to last this long much less that I will write 14 posts that touch upon SBP Amendment Act. Moreover, as the SBP Amendment Bill is making its way to the Senate tomorrow where it is expected to sail through, hopefully, this is the last post on the topic.
On January 21, 2022, SBP’s Domestic Market and Monetary Management Department issued circular number 2 of 2022
Cash Reserve Requirement for Banks That Meet/ Do Not Meet Targets for Housing and Construction Finance
Please refer to DMMD Circular Letter No. 03 dated October 07, 2020 on the captioned subject.
… banks falling short of their quarterly financing targets, as approved by the State Bank, will maintain, over & above the standard CRR, an additional CRR, in the next quarter, by the amount equivalent to two times of the shortfall in achieving financing target, as of relevant quarter end vis-à-vis that of corresponding quarterly target approved by the State Bank.The above instruction will be applicable for quarterly financing target approved by the State Bank for the calendar year 2022.
The October 7 DMMD circular No.3 of 2020 referred to in above circular says the following
Please refer to IH&SMEFD Circular No. 10 of 2020 dated July 15, 2020….
3. State Bank of Pakistan has been actively engaged, through policy interventions and proactive engagement with the banking industry, to revitalize the credit flow to the housing and construction sector. In continuation of such policy measures, it has been, therefore, decided – with an aim to facilitate the banks fulfill the aforesaid advised mandatory financing targets – to prescribe following amendments in the instructions on the Cash Reserve Requirement (CRR), issued vide DMMD Circular No. 04 of 2018:
i. The banks fulfilling or exceeding their quarterly financing target, as approved by the State Bank, will maintain a lower CRR, in the next quarter, by an amount equivalent to incremental outstanding financing as of relevant quarter end, for the housing and construction of buildings vis-à-vis that of outstanding portfolio as of June 30, 2020.
ii. Whereas, the banks falling short of their quarterly financing target, as approved by the State Bank, will maintain, over & above the standard CRR, an additional CRR, in the next quarter, by the amount equivalent to deficit in achieving financing target, as of relevant quarter end vis-à-vis that of corresponding quarterly target approved by the State Bank.
The IH&SMEFD Circular No. 10 of 2020 of 15 July 2020 referred to in the earlier circular says the following:
1. With a view to promote housing and construction of buildings (Residential and Non-Residential) in Pakistan, State Bank of Pakistan (SBP) has decided to advise mandatory targets to the banks. Accordingly, each bank shall ensure that the financing for housing and construction of buildings (Residential and Non-Residential) shall be at least 5 percent of their domestic private sector credit by December, 2021.
3. SBP will keep a close monitoring of progress on the mandatory targets. Non-compliance in meeting the targets shall attract punitive action under the relevant provisions of the Banking Companies Ordinance, 1962.
Putting the above in a chronological timeline
July 16, 2020: SBP gives mandatory targets to banks of housing and construction shall be 5% of their domestic private sector credit by December 2021. In case of noncompliance, penalties will be imposed (the circular doesn’t specify the penalties).
We used to joke privately that banks would rather pay the penalty than lend such huge amounts to a sector they aren’t comfortable lending to.
October 7, 2020: Penalties (and relaxations) are announced. The banks which failed to meet the target, will have to maintain incremental CRR with SBP in the amount equal to shortfall in their target.
This step by SBP isn’t groundbreaking. Reserve Bank of India had imposed similar relaxations 6 months earlier and I predicted in the tweet below that those won’t have much of an impact. The SBP policies that I am referring to in the below tweet were relaxations in prudential regulations that SBP did in 2019 (see subsequent tweet) to promote low cost housing yet there was zero effect of those policies.
It appears that incremental CRR penalty isn’t having as much an impact as SBP desired. Thus,
Jan 21, 2022: SBP is doubling the penalty. The banks will have to maintain incremental CRR in the amount equal to TWICE the shortfall in the 5% housing and construction target.
Now let’s move to meats and potatoes of this post. Under Section 20 of SBP Act 1956, as readers of this substack will know by heart by now, once the SBP Amendment Bill 2021 becomes effective, SBP isn’t allowed to engage in development finance activities. Readers would also know by heart that SBP Amendment Bill defines Development Finance Activities (DFAs) as
ffa) “development finance activity" means to undertake an activity to promote any activity of any priority sector such as agriculture, small and medium enterprises, housing or other such sectors;”;
While we can argue whether export sector falls under the development finance activity, there is no question that housing falls under DFA as it is specifically mentioned in the above definition. The way DFA is defined in the bill, SBP is prohibited from taking any action, no matter how inconsequential, to support housing. Let’s read the bold part of the definition again
to undertake an activity to promote any activity of any priority sector
and then it goes on to mention housing. The SBP Amendment Bill is placing a blanket ban on extending support to housing. There can’t be two opinions about it as the language can’t be clearer.
Now lets revisit the language in above circulars to see why is SBP imposing these mandatory targets and CRR penalties:
As per July 2020 circular, the target was imposed
With a view to promote housing and construction of buildings (Residential and Non-Residential) in Pakistan
And as per October 2020 circular,
State Bank of Pakistan has been actively engaged, through policy interventions and proactive engagement with the banking industry, to revitalize the credit flow to the housing and construction sector
In sum, SBP continues to be proactively engaged in an activity which will be prohibited as soon as SBP Amendment Bill is passed.
People may argue, and there are many who take whatever comes down from ivory towers of SBP and IMF as holy revelations, that the reason SBP is doing this now is because the bill hasn’t passed yet. But that will be 👇
SBP and MoF have been trying to get this bill approved since March 2021 (that we know of) and only recently rushed it through cabinet and the National Assembly. Would SBP have stopped this activity if the bill had been passed through an ordinance in March 2021 as SBP higher ups wanted?
The last sentence of January 21 circular reads
The above instruction will be applicable for quarterly financing target approved by the State Bank for the calendar year 2022.
SBP has approved the targets for calendar year 2022. This shows that SBP does not have any intention of ending the support it extends to housing. Not a lawyer but I think this circular of SBP will be, what legal types call, “ultra vires” of SBP Act.
I had written the below with respect to SBP’s primary objective but they are equally applicable to the definition and prohibition of development finance activities.
It is a shame that in a period of 10 months, the top technocratic minds of SBP, MoF and IMF can't get the first paragraph of the SBP Amendment Bill right.
It’s a shame that in the 10 months (that we know of as the first draft was leaked in March 2021 over WhatsApp) that the draft was being discussed amongst the top technocrats of IMF, SBP, and Ministry of Finance, no one questioned the primary objective description. Apparently, they just copied and pasted it from an IMF manual.
Can you believe that the top technocratic minds at SBP, MoF and IMF came up with these objectives and didn’t feel a need to clarify them in the 10 months that we know they were discussing it amongst themselves? Quite a display of incompetence if you ask me. Should be embarrassing for those that came up with it
To summarize, SBP Amendment prohibits activities that SBP is engaged in and will continue to be engaged in yet neither SBP or MoF is interested in rectifying such an obvious error in the SBP Amendment Act.
The intention at SBP and MoF appears to be to get the bill approved to please the IMF yet continue with DFAs and QFAs in violation of the SBP Act and promises to IMF.
It must be clear from my writings/tweets that I am in favour of state intervention such as industrial policy, import substitution, financial repression, QFAs as well as DFAs as long as they are structured efficiently. Hence, not once have I proposed here or ever that SBP stop supporting the housing sector or stop its DFAs to comply with the Amendment. My suggestion throughout has been to correct the mistake in the bill.
It’s a shame in the 10 months that the bill has been with them, top technocrats at SBP and MoF didn’t have the self confidence to take this up with the almighty IMF to remove prohibition on DFAs and QFAs in the SBP Amendment Bill.
This is supposed to be a short post so I will not go over how SBP and banks manipulate statistics with respect to construction financing. You can read one of the posts that I have written on that by clicking on the below link.
