Circulars/Notifications - Domestic Market & Monetary Management Department  
 DMMD Circular Letter No. 03 of 2020 October 07, 2020

The Presidents / Chief Executive Officers,
All Banks.

Dear Sirs/Madams,

Cash Reserve Requirement for Banks That Meet/Do Not Meet
Targets for Housing and Construction Finance

Please refer to IH&SMEFD Circular No. 10 of 2020 dated July 15, 2020, whereby, 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).  

2. 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.

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:

  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 effective date given in Para 3 (x) below. 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. An illustration showing the calculations of CRR adjustments is provided at Annexure-A.

  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 as described in Para-E of DMMD Circular No. 05 of 2018.
  10. The aforementioned instructions will be effective w.e.f December 31, 2020.

4. Please be advised that punitive action, in addition to aforementioned additional CRR requirement,  may be taken against those banks that fall short of fulfilling the advised mandatory financing targets.

5. All other instructions on the maintenance of CRR and mandatory financing targets shall, however, remain unchanged. The banks are advised to follow the revised instructions in letter and spirit. Any deviation or non-compliance of the same shall attract punitive action under the relevant provisions of the Banking Companies Ordinance, 1962.

6. Please acknowledge receipt.

Yours truly,


(Muhammad Amin Khan Lodhi)


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