October 7, 2020 (MLN): In continuation of its policy measures to revitalize the credit flow to the housing and construction sector, the SBP has prescribed some amendments in the instructions on the Cash Reserve Requirement (CRR), with an aim to facilitate the banks fulfill the mandatory targets equivalent to 5 percent of their domestic private sector credit by December 31, 2021.

For the unversed, via circular dated July 15, 2020, banks were advised to achieve mandatory targets equivalent to 5 percent of their domestic private sector credit by December 31, 2021, for financing to housing and construction of buildings (residential or otherwise).  

The banks were also advised to develop time bound “Action Plan” with quarterly financing sub-targets, inter alia, to enable periodical monitoring of actual progress being made for achieving aforesaid mandatory financing targets by the timeline prescribed thereof.

Since the SBP has been actively engaged, through policy interventions and proactive engagement with the banking industry, to rejuvenate the credit flow to the housing and construction sector, therefore, in this regard, it prescribed  the following amendments in the instructions on the Cash Reserve Requirement (CRR), which will be effective from December 31, 2020.

1. 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.
2. 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.
3. The instructions prescribed at Para 3(i-ii) above will be equally applicable on all banks, including small banks. Nevertheless, such small banks, operating with less than ten branches, and specialized banks that do not have infrastructure to extend financing for housing and construction of buildings, may utilize the following option:

   They may enter into arrangement with any other partner bank and provide required funding to it on mutually agreed terms and conditions for onward extension of financing, on their behalf, towards fulfillment of aforesaid mandatory targets; provided, the partner bank undertakes to extend this financing over and above its own approved quarterly financing target.  In case of failure, the partner bank will comply with the condition laid down in Para 3(ii) above.

4. The housing finance and construction loans extended as a result of Balance Transfer from one bank to another will not be counted towards fulfilling mandatory advised targets of the acquiring bank for housing and construction finance. Consequently, such financing facilities will also not be eligible for lower CRR benefit as well.
5. The benefit of lower CRR, resulting due to the treatment prescribed at Para 3(i) above, will be capped at 1 percent of Demand & Time Liabilities (DTL) subject to CRR of the bank for the relevant quarter.
6. The aforesaid adjustment in CRR will not be applicable to minimum daily requirement. Accordingly, both conventional banks and Islamic Banks/Islamic Banking Branches shall continue to maintain daily minimum CRR, which is currently at 3 percent.
7. In view of above, adjustment applicable to cash reserve requirement of the bank will be worked out at each quarter end, starting from December 31, 2020. The adjustment in CRR so calculated will be applicable from the first reserve maintenance period after 21st day of subsequent month of the quarter end in which bank is required to maintain additional / lower CRR. This adjustment in CRR will remain applicable up to first reserve maintenance period after 21st day of the subsequent month of the next quarter end.
8. For conventional banks having Islamic Banking Branches, the additional or lower CRR (as the case may be) applicable to the bank shall be divided between the conventional and Islamic Banking Branches in the ratio of their respective Demand and Time Liabilities (DTL) subject to CRR.
9. This additional or lower CRR (as the case may be) of conventional banks and Islamic Banks/Islamic Banking Branches shall accordingly be adjusted in monitoring of liquid asset requirement.

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