India: NHB plans to structure loans
India, June, 18 2006 -
The home loan market could grow faster, with the National Housing Bank (NHB) working on ways to structure products that will expand the market for housing finance to include urban slums and low-cost rural housing.
The housing regulator is looking at products where the repayment schedules coincide with the cashflow of farmers and self-employed. Banks and housing finance companies (HFCs) prefer to enter this space, in partnerships with established microfinance institutions (MFIs).
The key issue in expanding the market to include low-cost funding is the lender’s fixation for equated monthly installments (EMIs), said Vijay Mahajan, founder of Basix, a microfinance institution. “Low-cost funding needs the lender to move away from EMIs. For borrower, who do not have a steady income funding, has to be more cash flow-based, rather than collateral-based,” he said.
NHB, the regulator for HFCs, is planning to rope in commercial banks, regional rural banks, MFIs and other credible financial intermediaries for this purpose. The idea is to provide not just a mere shelter, but also a productive earning platform to people.
Partnering with an MFI makes it easier for banks and HFCs to assess the credit risk, given the availability of the borrower’s credit history and the MFI’s ability to underwrite risk. MFIs prefer getting into tie-ups with banks given the higher ticket size of the loan and the longer tenor involved.
NHB is looking at launching customised products for the EWF (economic welfare) section. These products would vary in their repayment schedules so as to suit the income flow of these people. NHB’s CMD, S Sridhar said, “The idea is not to provide a mere shelter, but a productive platform to people. For example, if the bank gives a loan to construct an additional room, the house owner could use it for basket weaving or prepare snacks for sale. In fact, in Andhra Pradesh, people have borrowed to construct additional rooms so that they can weave saris. This is called productive housing. This will add to the household income, which would, in turn, enhance the repayment capacity of the borrower.”
He explained, “Banks have linked the repayment of agricultural finance to the harvest season. So like any of us, they are not required to pay EMIs. We can extend a similar repayment cycle to such people as well depending upon their occupation.” Another aspect is modification of NPA norms.
Given that this project will take care of the housing needs of the poor, the banks could give some leeway in classifying a loan as a NPA, he added. So far, NHB has carried out pilot project in areas like Tirupathi in the South and Dharavi in Mumbai.
Even before NHB kick-started the discussions with banks and HFCs, some banks were offering loans to the common and poor. SBI has carried out similar projects in Waradha while Indian Bank carried it out in Southern part of Tamil Nadu.