Housing finance needs govt support

India faces a housing shortfall of more than two crore homes in urban areas and close to four crore in rural areas. More than 96% of this housing shortage is in the economically weaker section (EWS) and low income group category (LIG).

As slums and unplanned real estate spring up, the housing shortfall is creating significant repercussions on India’s new city dwellers and the way its cities are developing. Large-scale affordable housing in cities is the greatest necessity of the country. For housing finance companies and real estate developers, this is both an opportunity and a challenge.

The government’s support to the housing sector in this year’s Budget is a step towards realising its vision and mission of “Housing for all by 2022.” Finance Minister Arun Jaitley provided the necessary sops to buyers and home suppliers which would act as catalysts to spur affordable home construction activity in the country.

The Union Budget 2017 also increased the allocation for affordable housing segment by 39% under the Pradhan Mantri Awas Yojana (PMAY) for this financial year. It extended the Credit Linked Subsidy scheme to loans of up to Rs 12 lakh to cover middle income group (MIG) people as well. It has facilitated a 4% interest rate rebate on housing loans of up to Rs 9 lakh. The rebate stands at 3% on loans up to Rs 12 lakh.

Besides this, the government has granted infrastructure status to affordable housing. Meaning, now developers can enjoy cheaper sources of funding, including external commercial borrowings (ECBs). Also, affordable housing promoters will get more time for project completion. Moreover, the deadline will increase to five years, up from the current three years.

Housing finance companies (HFC) and non-banking finance companies play a crucial role in bridging the funding requirements of people. The challenge among housing finance companies, especially in the affordable housing finance sector is to lend to customers who have been ignored by the traditional banking sector.

In order to meet the government’s mission, these finance companies have to adopt a new mechanism to evaluate these first time borrowers in the system. It’s a known fact that buying a house for this customer is a matter of great pride thus defaults are expected to be limited.

The availability of cheap finance is a motivator as well for the home loan sector in the country that consists of 76 lenders. These include state-run banks, private banks, and housing finance companies (HFCs). All of which are trying to woo customers. Even as there are several new entrants in the arena, the housing finance companies still dominate it because they continue to score over their traditional banking counterparts.

With a focus on middle-class and aspiring lower-middle-class borrowers, the HFCs lend to people with an annual income that ranges from Rs 2 lakh to Rs10 lakh. Leading HFCs are now offering tailor-made affordable housing schemes at 8.5–9%. Borrowers can get a higher loan-to-value (LTV) ratio as well. They can avail up to 85% for housing units that are ready or are nearing completion. A traditional bank would offer only 80–85%.

Raising funds

A big challenge for affordable housing finance companies is raising funds to meet the funding requirements of the customers. Most state-owned banks continue to struggle with huge non-performing loans and hence, raising funds from state-owned banks continues to be challenging.

The current outstanding due of housing finance companies is estimated at around Rs 10 lakh crore. With the government’s housing for all mission, this outstanding due is expected to double in the next five years. Although the nodal agency for housing finance, the National Housing Bank, has been crucial in allowing new players to enter the arena, but these companies have received government support till now.

Companies which will not be able to find an alternative opportunity to raise funds will find the environment challenging despite the huge opportunity in front of them. Unfortunately, the sector is yet to see a big investment from private equity players or from venture capitals. The sector needs investment for long-term debt support which is very crucial for the success of PMAY and the entire segment of affordable housing.

(The writer is CEO and Managing Director, Khush Housing Finance)