BackRural Tamil Nadu buys land with EMI schemes
Rural Tamil Nadu buys land with EMI schemes
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R. Ravichandran, a small time distributor of tea in Rajapalayam district of Tamil Nadu, proudly displays a notebook that will help him own a small piece of land—in three years. He and his wife share a small two-room house in a village along the highway, 6km from Rajapalayam, known for textile manufacturing. Even though he earns only Rs4,000 a month, just enough to support his household expenditure, he has drawn up plans to buy a piece of land for himself.
The plan is simple. Each month, Ravichandran will pay Rs170 to a real-estate fund; at the end of 40 months of payments, he will own 2.75 cents of land (100 cents make an acre) in S. Ramalingapuram village, about 3km from Rajapalayam.
“There is no way I can pay the money upfront. This scheme will help me buy a piece of land for myself," said Ravichandran.
People like Ravichandran constitute a growing market for land. And lack of access to formal sources of funds, such as banks, combined with the government abdicating its responsibility of housing for the poor, could be reasons behind the popularity of land schemes such as the one Ravichandran has subscribed to, said M. Vijaybaskar, assistant professor at the Madras Institute of Development Studies (MIDS), whose area of interest includes informal economy, which is defined as the economy beyond the control of government regulations. It isn’t known whether other states have such schemes—it is likely they do—but chit funds and informal instalment schemes have always been popular in Tamil Nadu.
Ravichandran banks with a public sector bank but does not have a cheque book; nor was he able to obtain financing for his business. The scheme he is a part of, named “Pavala Karuda Real Estate", is selling around 1,100 plots to others in the same village as him.
Those who join, have an incentive. If they get lucky, they could be one of the 40 who may end up with land that is only part paid for, in a monthly draw that pulls out one winner each month. The winnner has the land tranferred to his name after a 30-month wait. Mint was unable to establish contact with any such winners.
The remaining sign an agreement whereby Pavala Karuda says it will sell the land at the end of 25 months, after the bulk of the payments have been made. However, the title deed will be registered only after all instalments are paid.
Such land ownership plans are not localized, and are popular in many districts dominated by the low-income group.
“The schemes could help the poor to buy a small piece of land," said Vijaybaskar.
Kannan (he uses only one name), a head mason residing in Madurai, a temple city located 480km south of Chennai, has also enrolled in one such plan. He pays Rs250 every month to own a three-cent plot of land, approximately 30km north of Madurai, which could be his in three years. His work in the construction industry helps him to earn between Rs2,000 and Rs8,000 per month, but he might go without income for three months in a year. As a result of fluctuations in income, he is not able to access bank financing.
“For people in the low-income group, informal sources are the easy way to finance," said Preethi Rao, a research associate at the Small Enterprise Finance Centre at the Institute for Financial Management Research (IFMR). “They don’t have access to finance from banks." Traditionally, “poor people depended on money lenders or chit funds to buy assets like land", she added.
Senthil, who runs the Pon Achaya Real Estate scheme, said that most of his customers are poor. He recently floated a land ownership plan spread over 125 acres near Rajapalayam, with 3,000 plots. Depending on the size of the plot, customers pay between Rs150 and Rs200 per month.
He refused to disclose the business model, but said he has purchased 60% of the land and has made an advance payment for the remaining 40%. He hopes to pay the amount due with the instalment money he receives from the customers of the land scheme.
“It helps them to buy lands which they would not have otherwise got," said Senthil, who also gave only one name.
Under the Pavala Karuda scheme, where Ravichandran is a customer, around 1,100 plots are being sold. The managers of the scheme, such as Senthil, employ agents whose job is to go around villages and poor localities in urban areas and convince people to join the scheme. It is not clear how much the agents are remunerated for their efforts.
Part of the success of such schemes comes from the dip in agricultural output in the country—something the government is struggling to fix. “A lot of agricultural land is becoming redundant because agriculture is not viable," said Vijaybaskar. He added that the average growth of agriculture in Tamil Nadu was around 1.5% during the last decade—below the national average.
However, as Tamil Nadu is more urbanized than some other states, people are mobile and have been able to find alternative employment opportunities, mostly in informal sectors, he explained. “Poor people dependent on agriculture cannot be part of such schemes as they lack regular flow of income. I think most of the customers would be working in non-agricultural sectors in nearby urban areas," Vijaybaskar said.
In a working paper, Rao estimates that the cost of borrowing from chit funds varies between 1% and 2% per month, as against the rate charged by moneylenders, sometimes as high as 72% per annum.
One of the risk factors of land schemes is that most involve no legal documents and are entirely dependent on trust between the manager and the customers of such schemes. Senthil claims that he has been part of five similar schemes that ran successfully.
Ravichandran doesn’t know anyone who has secured land under the plan, but he is undaunted. “It’s one of our own, people from our village," he said. I “trust that they would not cheat us".
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