To direct more home loans to rural areas, National Housing Bank (NHB), the regulator for housing finance firms, is looking at a combination of measures, including acquiring minority stakes in finance companies already operating in these areas.
“I think there is a market (for rural housing credit). It (credit) can be done on a viable basis,” said NHB chairman and managing director S. Sridhar.
The bank plans to come up with a booster package for rural home loans as the boom in housing finance in the last five years has been confined largely to metros. Moreover, data shows that the growth in home loan credit levels is primarily on account of an increase in property prices and not an increase in construction of new houses.
In 2005-06, the total housing loans disbursed by the industry was Rs86,034 crore, of which banks accounted for about 68%.
The outstanding housing loans of banks on 31 March 2005 was Rs1.26 trillion, a compound annual growth of 37.8% over a six-year period. The number of loan accounts (a proxy for number of houses) during the same period on the other hand grew by a compound annual growth rate of 8.5% to touch 3.66 million.
In the same period, NHB says, the share of rural areas in total housing finance has remained constant at 10.3%, while that of metropolitan areas has increased from 37.2% to 47.2%. NHB is currently studying the possibility of taking a minority equity stake in a couple of housing finance firms, which are looking largely at rural markets.
Sridhar, who declined to identify the firms, said the markets would correspond to the Union government’s definition of rural areas. The 2001 census used a set of four conditions that had to be met simultaneously, including a minimum population of 5,000 for an area to be classified as urban. The residual area is categorized as rural.
Sridhar says, NHB was also open to other options, including piggybacking on consumer companies equipped with a large rural network and open to the idea of extending rural housing credit. It has suggested a credit guarantee for rural home loans taken by lower income groups to mitigate lender’s risk as one measure to boost lending. In a recent study on the housing finance industry, NHB said a Rural Risk Fund could be set up to provide a credit guarantee cover for loans up to Rs1 lakh for low-income group borrowers in rural areas where collateral is unavailable or title deeds are defective. The risk fund would need to be supported by the government, NHB and banks, said the study.
The question of defective titles, which normally discourages lending institutions, in rural areas is not as serious as it may appear initially, according to NHB. “The ownership is not in doubt as certificate from the village panchayats or land revenue officer, or payment of local property tax are adequate proof apart from local community feedback,” said the study.
One of the biggest challenges NHB might face in directing more credit to rural housing is the commercial opportunities urban housing credit continues to offer. “I don’t think there is a shortage of funding in satellite towns. Currently, in rural areas economics of housing finance is not as profitable as urban areas and satellite towns,” said Sanjay Aggarwal, national industry director with audit firm KPMG.