One-year window limits effectiveness of interest subsidy scheme for housing

Borrowers taking loans for under-construction houses may not get subsidybenefit if the construction is not completed within the one-year window

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Loans taken for under-construction houses may not be eligible for subsidy if there’s delay in completion

The Centre’s credit-linked interest subsidy scheme for housing loans taken by people in the mid-income group has been pitted as a big relief to home buyers, with an upfront interest subsidy of ₹2.3-2.35 lakh.

While the scheme aims to expand credit flow to meet the housing needs of the urban poor, by covering a wider income group, limiting the validity of the scheme to only one year can leave many borrowers in the lurch.

The scheme, effective January 1, 2017, and available only in 2017, will benefit borrowers taking loans for buying ready-to-occupy houses.

But given that inventory of houses in the affordable segment is relatively scarce, most borrowers availing loans for under-construction houses may end up coughing up the entire interest amount, if construction is not completed within the stipulated one-year window.

Contours of various schemes

The Centre’s latest scheme for the middle-income group (MIG) follows the scheme already available for economically weaker sections (EWS) and low-income groups (LIGs) under the ‘Pradhan Mantri Awas Yojana (Urban) – Housing for All’ scheme.

In 2015, the Centre had announced the credit-linked subsidy scheme (CLSS) offering an interest subvention of 6.5 per cent on housing loans to the EWS and LIGs. The urban poor, with an annual income of up to to ₹3 lakh, is defined as EWS and ₹6 lakh as LIG.

Under this scheme, a credit-linked interest subsidy of 6.5 per cent on housing loans of up to ₹6 lakh for a tenure of 20 years (revised from 15 years effective January 2017) is provided to the EWS and LIG categories.

The subsidy will be paid upfront, on net present value (NPV) basis of ₹2.3 lakh per beneficiary.

The newly-launched CLSS for MIG covers two income segments — ₹6,00,001 to ₹12 lakh (MIG-I) and ₹12,00,001 to ₹18 lakh (MIG-II) per annum.

MIG-I will be offered interest subsidy of 4 per cent for loans up to ₹9 lakh and MIG-II an interest subsidy of 3 per cent for loans up to of ₹12 lakh.

The interest subsidy will be calculated again at 9 per cent NPV over 20 years or the actual tenure, whichever is lower. The subsidy could thus work out to a maximum of ₹2.3-2.35 lakh per beneficiary.

Weak links

The key limitation of the scheme for MIG is that it is available only for a period of one year, in 2017. This implies that the property (if under construction) has to be completed in one year.

“In the first phase of the scheme under EWS and LIG, nodal agencies stated that we (housing finance companies), can submit a claim if the full loan is disbursed and the property is owned by the borrower,” explains Sudhin Choksey, Managing Director, Gruh Finance.

If the same operational guidelines apply, then under the new scheme, the property has to be completed in one year, that is, by December 31, 2017. Hence, lenders may not be able to disburse the full loan within one year and borrowers may not get the benefit of the interest subsidy, unless the Centre extends the window.

“It is imperative to communicate to borrowers the available time window, so they can opt for ready-to-use houses rather than under-construction property to avail of the subsidy benefit,” adds Choksey.

But given that the stock with real estate developers is mostly in the higher-end segment, borrowers may not be able to find enough ready-to-use property in the affordable segment. Also, the scheme lays down specific dwelling area — carpet area of up to 90 square meters and 110 sq m for MIG I and MIG II, respectively. This could also pose challenges.

Under the earlier scheme — CLSS for EWS and LIG — ₹413.4 crore subsidy was given by the nodal agencies to only about 22,500 beneficiaries spread across 85 primary lending institutions (PLIs).

According to a report submitted by a technical committee to the Ministry of Housing and Urban Poverty Alleviation, India’s urban housing shortage is estimated at nearly 18.78 million households. The shortage is acute across EWS and LIG groups, which together constitute over 95 per cent of the total housing shortage.

Some market players also question whether the MIG category of borrowers (up to annual income of ₹18 lakh) need such dispensation at all.

Published on March 24, 2017
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