News Analysis

Housing finance cos to gain from tweaks in interest subsidy scheme

Radhika Merwin | Updated on January 09, 2018 Published on November 17, 2017

With the hike in carpet area, more home-buyers will be eligible for relief

The Centre’s credit-linked interest subsidy scheme for housing loans taken by people in middle-income groups (MIGs) is set to benefit a wider set of home buyers. Aside from income eligibility, the scheme had laid down conditions on carpet area.

Now, with the increase in dwelling area, more home buyers can benefit from the scheme. The carpet area of up to 90 square meters and up to 110 sq mt for MIG I and MIG II (the two income segments), respectively, has been increased to up to 120 sq mt and up to 150 sq mt.

Launched in the beginning of this year, the Centre has been ironing out various weak links in the scheme. Extending the validity of the scheme to March 2019, and the recent increase in dwelling area, should help expand credit flow to the urban poor to meet their housing needs.

Contours of the scheme

The credit-linked subsidy scheme for the MIG, effective January 1, 2017, referred to as CLSS-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 is offered an 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 is calculated at 9 per cent net present value (NPV) over 20 years or the actual tenure, whichever is lower. The subsidy works out to a maximum of ₹2.3-2.35 lakh per beneficiary.

Based on the loan disbursed by primary lending institutions (PLIs) to MIG beneficiaries, Housing and Urban Development Corporation (HUDCO) and National Housing Bank (NHB), identified as central nodal agencies (CNAs), release the subsidy amounts to PLIs.

Subsidy is credited by the PLI to the borrower’s account upfront by deducting it from the principal loan amount of the borrower. The borrower pays the EMI on the remainder of the principal loan amount.

There had been several weak links to the scheme when it was initially launched.

Ironing out issues

One, it was first made available only for a period of one year. This implied that the property (if under construction) had to be completed in one year.

Given that inventory of houses in the affordable segment are relatively scarce, most borrowers taking loans for under-construction houses would have ended up coughing up the entire interest amount if construction was not completed within the stipulated one-year window.

This drawback was addressed by extending the scheme to March 2019.

The other key limitation was the eligible carpet area. The specified dwelling area was proving to be a challenge to draw home buyers within this segment. The increase in carpet area will offer more choice for buyers in the MIG.

“The affordable housing segment and, in turn, housing finance companies will stand to benefit as the supply of houses in this category goes up. Those borrowers who were unable to make the cut — not meeting the dwelling area criteria — will now be able to avail themselves of the benefit under the scheme.

“The increase in demand will also bring down the cost of property in this segment,” explains Sudhin Choksey, Managing Director, Gruh Finance.

The gainers

Gruh Finance’s strong loan disbursement in the first half of FY18 is indicative of the growing traction in the affordable housing space.

The company delivered a 29 per cent year-on-year growth in overall loan disbursements as of September 2017.

“It needs to be seen how the recent increase in carpet area impacts actual disbursements,” adds Choksey. Market leader Housing Development Finance Corporation’s September quarter results too indicated increased activity in the affordable housing segment.

For the first time in many years, the company’s average loan ticket size fell notably, indicating to some extent that the Centre’s various initiatives for the affordable housing segment are taking off.

For Gruh Finance, however, that has an average loan ticket size (on outstanding loans) of around ₹6.5 lakh, the focus is more on the Centre’s earlier scheme for economically weaker sections (EWS) and low-income groups (LIGs).

This covers the urban poor with an annual income of up to ₹3 lakh (EWS) and ₹6 lakh (LIG).

Gruh covered 7,800 households under the EWS and LIG categories in 2016. During the nine months of calendar year 2017, the housing finance company saw 12,000 households taking loans under the EWS and LIG categories.

At the overall industry level, based on latest figures available (few months back), the CLSS for EWS and LIG covered about 22,500 beneficiaries.

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Published on November 17, 2017
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