New Delhi: The government is working with the World Bank and the International Finance Corporation (IFC) to develop an appraisal mechanism for borrowers in the informal sector for disbursements under the mortgage risk guarantee fund for housing loans.
The idea is to rate earners without fixed monthly salaries and, are hence, considered unreliable borrowers by the lending institutions.
The mortgage risk guarantee fund was set up under the Rajiv Awas Yojana to enable the flow of credit from banks and housing finance companies to the economically weaker sections and low-income households. The creation of the fund, run by the National Housing Bank (NHB), was announced in this year’s budget by finance minister Pranab Mukherjee.
“The informal sector is increasing and the demand for housing with it. This segment has the earning and repayment capacity but because they do not have fixed monthly salaries, they are not considered as stable borrowers,” said R.V. Verma, chairman and managing director of NHB. “We are working with the World Bank and IFC on a technique to develop the appraisal profile for these segments so that lenders are comfortable to lend to this segment,” he added.
A World Bank spokesperson said, “We have just started work on this. At this stage, it is preliminary to share any details on this.” A questionnaire sent to the IFC spokesperson did not elicit a response.
The fund will have a corpus of Rs1,000 crore contributed by both the central government and NHB. Once the appraisal system is in place, disbursals under the fund will start. The fund will guarantee loans up to Rs5 lakh.
“It’s a good business opportunity for the lenders if they understand the market and measure the risk. Admittedly, extra cost is involved in appraising this segment,” Verma said. “Without salary slips, lenders will have to look into the earlier history of the borrower, his job patterns and the income flow.”
Workers in the unorganized sector are estimated to constitute more than 90% of the total workforce.
Anil Sachidanand, chief executive officer of Dewan Housing Finance said the move will improve the creditworthiness of borrowers in the informal sector and facilitate the process of financial inclusion. “When we lend to borrowers in this segment, we find that they are unable to bring in their contribution for purchase of the house, which increases their risk profile. The average loan to value (LTV) ratio insisted upon by lenders is around 75-80% and the borrowers are unable to come up with the remaining 20-25%,” he said. “With this guarantee, we could look at relaxing the LTV ratios and increase the tenor of the loans.”
NHB hopes to bridge the gap between the lenders and the informal sector borrowers and use international models to see how best to ensure credit flow to this segment.
“We are yet to arrive at a scoring mechanism. There are certain international models and we will draw upon their experience and see how it fits best with the Indian market,” said Verma.