HFCs may defend against bank loan takeovers under PMAY 2.0

Housing Finance Companies (HFCs) find optimism in PMAY 2.0 as the subsidy for eligible home loan beneficiaries will be spread over 5-yearly instalments, lowering the incentive for borrowers to switch lenders early in the loan term.

The recent revision in the interest subsidy scheme for home loans targeting EWS/LIG and MIG families, approved by the Union Cabinet last month, may serve as a blessing in disguise for housing finance companies (HFCs), helping them fend off banks that attract their borrowers with lower interest rates.

Despite the Government cutting the maximum subsidy on a home loan to ₹1.80 lakh under the Pradhan Mantri Awas Yojana (PMAY)-Urban (U) 2.0 Scheme from ₹2.67 lakh under the earlier Scheme, HFCs see a silver lining in this as the subsidy to be given to eligible home loan beneficiaries will be spread over five-yearly instalments, reducing the incentive for borrowers to switch lenders early in the loan cycle.

Deo Shankar Tripathi, Executive Vice-Chairman, Aadhar Housing Finance, said that it will be cumbersome for a home loan borrower to move to another lender early in the loan cycle as the subsidy is spread over five-yearly instalments.

He emphasised that this clause, in a way, resolves one of the key challenges faced by HFCs — their customers getting snapped up by banks once home loans get seasoned for a year or two.

Given that the subsidy to be given to eligible home loan beneficiaries will be spread over five-yearly instalments, borrowers will also ensure that their loan remains “standard” (that is there are no defaults in servicing the loan) for five-years in order to get the subsidy, said Tripathi.

The measures under the Pradhan Mantri Awas Yojana (PMAY)-Urban (U) 2.0 Scheme are more impactful for both lenders and borrowers, he added.

Pradhan Mantri Awas Yojana

Under the PMAY-U 2.0 Scheme, approved by the Union Cabinet on August 9th, beneficiaries taking loan up to ₹25 lakh with house value up to ₹35 lakh will be eligible for 4 per cent interest subsidy on first ₹8 lakh loan up to 12 years tenure. A maximum of ₹1.80 lakh subsidy will be given to eligible beneficiaries in five-yearly instalments through push button.

According to the earlier Scheme, subsidy was released by the central nodal agencies (CNAs – NHB, HUDCO and SBI) based on the disbursements made (over, say, a year) by the lenders to the beneficiaries. Subsidy, so disbursed by the CNA to the lenders, was credited by the latter to the borrowers account upfront by deducting it from the principal loan amount, thereby reducing their EMI burden.

Now, under the new Scheme, even if a lender makes home loan disbursement over a year, the subsidy would be disbursed only over five-year instalments, ensuring that loan switch to other lenders and defaults are minimised.

Experts say that once a borrower services a loan for five years in order to get the subsidy, it is unlikely he/she will default thereafter.

Under PMAY-U 2.0, financial assistance will be provided to 1 crore urban poor and middle-class families to construct, purchase or rent a house at an affordable cost in urban areas in 5 years. The Government will provide an assistance of ₹ 2.30 lakh crore under the Scheme.

The Government defines EWS (economically weaker section) households as families with an annual income up to ₹3 lakh; a LIG (low income group) households as families with an annual income from ₹3 lakh up to ₹6 lakh; and MIG (middle income group) households as families with an annual income from ₹6 lakh up to ₹9 lakh.

Home loan demand remains largely unscathed

CRISIL Market Intelligence & Analytics has assessed that the overall housing finance segment credit outstanding was approximately ₹28.7 lakh crore as of FY23.

“The overall housing market grew 16.7 per cent, led by the aspirations of a growing young population with rising disposable income migrating to metro cities and elevated demand in Tier 2 and 3 cities as well.

“Demand for home loans remained largely unscathed despite a sudden rise in repo rates,” it said.

Moreover, the income of the salaried class remained largely intact despite the economic slowdown caused by the Covid – 19 pandemic and rise in inflation, thereby allaying lenders’ concerns about any deterioration in asset quality.

Going forward, Crisil MI&A expects overall housing segment to grow at a CAGR (compounded annual growth rate) of 13-15 per cent from FY23 to FY27.