28 Mar 2017 18:59 IST

Breaking down the housing loan interest subsidy scheme

While CLSS brings good tidings for home loan borrowers, there are some weak links

In a bid to expand credit flow to meet the housing needs of the urban poor and to cover a wider income group, the Centre recently laid down operational guidelines for a credit-linked interest subsidy scheme for mid-income group individuals.

The scheme, announced by Prime Minister Narendra Modi during his New Year address, became effective from January 1, 2017. While offering an upfront interest subsidy of ₹2.3-2.35 lakh brings good tidings for home loan borrowers, there are some weak links in the scheme that the Centre needs to address to ensure better effectiveness.

What’s on offer?

Before delving into the scheme’s pros and cons, let us understand what’s on offer by way of interest subsidy schemes for various groups of income earners.

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

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

Under this, 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.

Middle income groups

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 ₹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 will thus work out to a maximum of ₹2.3-2.35 lakh per beneficiary.

A step forward

The Centre’s subsidy scheme for EWS and LIGs has been able to address some of the earlier issues under interest subsidy for housing the urban poor (ISHUP) and the Rajiv Rinn Yojana.

For one, the scheme has brought in more uniformity in calculating interest subsidy. Under Rajiv Rinn, National Housing Board (NHB) and Housing and Urban Development Corporation Limited (HUDCO) were appointed nodal agencies, and all banks and housing finance companies were supposed to claim their subsidy through them. But each had to formulate its own workings depending on the loan amount.

Also, the scheme raised the income ceiling for both EWS and LIG categories from ₹1 lakh to ₹3 lakh, and ₹2 lakh to ₹6 lakh respectively. This helped bring more people under the scheme’s ambit and made it more viable for lenders and developers to cater to this segment.

The ISHUP became non-viable because only the very poor qualified for the interest subsidy. Lenders, therefore, were not willing to extend loans to this section. Developers too were reluctant to construct for such low income households, according to market players.

The new scheme — CLSS for MIG — offering an upfront subsidy and dispensation to income earners up to ₹18 lakh, will ride on similar benefits.

Weak links

However, there are some 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.

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.

Given that the stock with real estate developers is mostly in the higher-end segment, borrowers may also not be able to find enough ready-to-use properties in the affordable segment. 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.

Other key hurdles

There are other issues too that need to be ironed out. In the past, lack of coordination between the Centre and the States has hindered the progress of such welfare schemes. While housing for all is a national agenda, land is a State issue and needs proper coordination between the Centre and the States.