The Hindu Business Line : Foundations for castles

House building has become the most vibrant activity among the middle-class of the 21st century. Ample tax-breaks with access to cheap bank loans, minimum pre-conditions and paper work have laid the foundation for a housing boom. Bank loans for building houses more than doubled in just a year; they have now outpaced total direct agricultural credit.

BANKING ON houses.

In an eloquent conclusion to his Budget speech, the Finance Minister, Mr P. Chidambaram promised: "It is our duty to put the foundations on which the young can build their castles."

But a part of the foundation was laid much earlier and millions of small castles have been built across the land. Undoubtedly, house building has become the most vibrant activity among the middle-class of the 21st century India. Ample tax-breaks with access to cheap bank loans, minimum pre-conditions and paper work, have laid the foundation. Since then, there has been no looking back for the housing boom.

Loans from banks for building houses more than doubled in just a year; they have now outpaced total direct agricultural credit — a sector that has been pampered with immense funds over decades.

But this in no way negates the rapid growth in agricultural loans in the country. By October 2005, direct farm credit had grown by 39 per cent to Rs 1,41,612 crore, surpassing the target for the year. The target of Rs 1,75,000 crore set for the next year looks modest and reaching agriculture credit of Rs 2,00,000 crore now seems feasible.

Housing loans

But these significant achievements pale before the strident growth and soaring levels achieved by the housing sector. Housing loans peaked to 125 per cent in just one year and touched Rs 1,53,267 crore — higher than the total agricultural loans — in October 2005 and it took less than a decade to achieve this. And, unlike the farm sector, its immediate stimulant was the tax-breaks, followed by pro-active initiatives of banks and their millions of customers.

The last decade saw the emergence of a strong Indian middle-class with rising disposable incomes, seeking constructive avenues for investment. The interest rate plunging from their historical highs and reining in of inflationary spiral resulted in a huge demand for housing loans. As returns outweighed risks, banks vied with one another to offer the cheapest rates, reduce paper work and extend top-quality service.

The spin-off effects were evident in increased demand for steel, cement, paint, electrical and sanitation fittings, and appliances. The diverse industries flourished, generating huge profits. And equity prices soared, generating a sense of felicity among millions of shareholders.

Agricultural loans

If prolixity is the hallmark used to measure successive Finance Ministers, then every single one of them has tried to out-perform his predecessor. Large allocations have been earmarked and momentary promises made to the farmers.

The latest Budget has gone one step further — promising farmers short-term credit at an attractive rate of seven per cent. But there seems to be resistance from banks. Bankers believe that the returns are not remunerative enough to warrant the risk. Paper walls are likely to be erected to avoid agricultural loans, as bankers hide behind a profusion of banking rules and guidelines.

That is one reason why agricultural credit has not taken off as envisaged. There is a far more fundamental causative factor: Lack of effective demand. Firm demand for agricultural loans will become a reality only when the farmer is confident of his long-term repayment ability. Bereft of real effective demand, farmers are not queuing up outside banks for loans. Along with the perpetual threat of droughts, floods, pests and other natural disasters, the poorer farmers are averse to adding a new risk of loan. While agricultural loans have been mainly supply-driven as banks try to fulfil government commitments, housing loans have been demand-driven, coming from millions of customers.

The duality

The cash flow and repayment schedules are also not in favour of the farmer. While an office employee has a cycle based on his monthly salary, the farmers often abide by an annual cycle based on the cropping pattern and climatic seasons. By historical legacy, bankers prefer monthly repayment cycles.

The credit-risk paradigm also weighs heavily against the farmer. His collateral, land, is his perpetual source of revenue. The deemed value of land remains far higher than any loan he can get. A natural disaster coupled with an outstanding loan could result in catastrophe. So he is perpetually averse to pledging his land as collateral.

On the other hand, the typical middle-class Indian is building a fresh asset — his house — from his salary. The bank's contribution in creating the asset is often far higher than the contribution of the customer. Even in liquidation of his asset, his income stream will continue. So the house becomes a viable effective collateral for him.

The real-effective demand for loans, backed by repayment ability, will emerge only when farmers are financially empowered. Creating good marketing system, reducing storage loss and ensuring remunerative prices down at the farm gate would go a long way in this empowerment. With the emergence of real repayment ability, banks would no longer fight shy of extending agricultural loans. And the government would not have to go through the annual exercise of writing off interest and, sometimes, even the principal, on outstanding agricultural loans.

More Stories on : Housing Finance | Insight | Economy | Farm credit

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