News Analysis

HFCs stand to gain from Centre’s recent tweak in interest subsidy scheme

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

Extending eligible carpet area will widen the scope of the scheme, increasing demand for such loans

The Centre's credit-linked interest subsidy scheme for housing loans taken by people in middle-income groups (MIG) 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 avail the benefit under the scheme. The carpet area of up to 90 square meters and 110 square meters for MIG I and MIG II — the two income segments — has been increased to up to 120 square meters and up to 150 square meters, respectively.

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 until March 2019, and the recent increase in dwelling area, should help expand credit flow to the housing needs of the urban poor.

Contours of the scheme

The credit-linked subsidy scheme for middle-income group, 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 NPV (net present value) 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 amount 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 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 availing loans for under constructed houses would have ended up coughing 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 middle-income group.

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

Gruh Finance’s strong disbursement of loans in the first half of FY18 is indicative of the growing traction in the affordable housing space. The company delivered a 29 per cent YoY 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 Rs 6.5 lakh, the focus is more on Centre’s earlier scheme for economically weaker sections (EWS) and low-income groups (LIGs). This covers urban poor with an annual income of upto to ₹3 lakh (EWS) and ₹6 lakh (LIG).

Gruh has covered 7,800 households under the EWS and LIG category in 2016. During the nine months ended calendar year 2017, the housing finance company has 12,000 households availing loans under EWS and LIG category.

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

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