Strangely, the growth in priority sector housing loans by banks and their share in the overall priority sector lending have fallen in the three years following the launch of the government’s affordable housing scheme.

The chart above shows that in fiscal year 2014 (FY14), housing loans under priority sector grew by 13%, contributing 16.5% to the total priority sector disbursement. This growth has now dropped sharply to a mere 2% in FY18 and forms 14% of the total priority sector lending.

It would seem that the government’s push towards housing and the offer of big interest rate subsidies under the credit-linked scheme have hardly made a ripple in bank lending to the sector.

Therefore, even the latest tweaks in the definition of affordable housing for subsidy to the middle-income group and the Reserve Bank of India’s (RBI’s) hike in the housing loan amount eligible for priority sector are unlikely to make a big difference to banks. “Going forward, incremental funding from banks especially PSBs will be lower owing to their capital constraints," rating agency Icra Ltd wrote in a note.

That said, public sector banks are the main lenders to the economically backward and low-income groups under the interest rate subsidy scheme.

The credit subsidy scheme of the government divides beneficiaries into three segments based on household income and size of the house to be purchased. Households with incomes of up to 6 lakh seeking to buy a house of up to 60 sq. m area are considered part of the economically backward and low-income group and eligible for an interest rates subsidy of 6.5%. The condition is that the subsidy is only for loans of up to 6 lakh.

Those with an annual income of 6-12 lakh come under the middle-income group-I and are eligible for a 4% subsidy for a loan amount of up to 9 lakh. Those with a higher annual income of 12-18 lakh come under the middle-income group-II and are eligible for a 3% subsidy for a loan of up to 12 lakh.

Note that there is no cap on the cost of the house purchased or even the total loan amount. According to brokerage firm Jefferies India Pvt. Ltd, the average cost of a house covered under the government’s scheme for urban centres is about 5.65 lakh. The government recently increased the size of houses eligible for subsidy for the two middle-income groups.

But if not the banks, who is lending to the subsidized housing market?

About 80 housing finance companies have taken away market share from banks. Some of them lend exclusively to affordable housing projects and have grown faster than the wider industry. Even the largest home loan lender Housing Development Finance Corp. has seen its growth coming mainly from the affordable housing segment.

The easing of definition by the government and RBI’s expansion of the ambit of the priority sector tag for housing will provide a fillip to the housing loan market. But the biggest beneficiaries would be the finance companies and not banks.