Data provided by housing finance companies along with results on rollout of revised Credit Linked Subsidy Scheme will be key
The Ministry of Housing and Urban Poverty Alleviation (MHUPA) has put out guidelines on the revised Credit Linked Subsidy Scheme (CLSS) under the Pradhan Mantri Awas Yojana (Urban) Mission towards Housing for All. This follows an announcement by the Prime Minister on December 31, 2016.
What is the scheme about and what is the revision?
Under the existing scheme, households with annual incomes of up to R0.3m and R0.6m were eligible for an interest subsidy at the rate of 6.5% for housing loans of up to R0.3m and R0.6m, respectively, for loan tenure of up to 15 years. On December 31, 2016, two new categories were added with subsidies of 4% and 3% for loan amounts of up to R0.9m and R1.2m, respectively, but there were no details on income eligibility.
Subsequently published media reports suggested that households with annual incomes of up to R1.2m and R1.8m would be covered. The final guidelines have confirmed this and have extended the loan tenure for which the benefit is available from 15 to 20 years. This is effective initially for a period of one year starting January 1, 2017.
Effectively, a person with annual income of up to R1.8m is eligible for an interest subsidy on a housing loan of up to R1.2m, and the rest of the loan will be non-subsidised. The NPV of the benefit over the tenure of the loan will be computed using a 9% discount rate. This amount will be credited to the loan account of the borrower upfront. On our approximate computations, the maximum benefit across the four categories of borrowers could range from R0.13m to R0.27m.
The benefit is available only to first-time home buyers
Only a family where no member has ever owned a all-weather house in any part of India will be eligible. A family is defined as husband, wife and dependent children. The scheme is likely to cover a much larger house-buying population; we plan to monitor implementation over the next quarter. Data provided by HFCs along with results on the rollout of the benefits will be key.
While this could boost housing demand from the end-user segment, the upfront subsidy will likely reduce loan offtake. Hence, we plan to wait and watch for end impact on loan growth. Average loan ticket size for most large HFCs is R2-3m, implying a roughly 10% lower loan requirement across borrowers on average, as we assume all eligible borrowers will avail themselves of this benefit (and not only the incremental demand “hypothetically” created by this scheme).
The scheme discourages balance transfers but is silent on prepayments; there’s loan re-pricing risk
The guidelines mention that the scheme benefit will not apply from the point of balance transfer. However, the guidelines do not explicitly disallow prepayment from own sources. Further, we do not think lenders will be able to discriminate between borrowers (those who have availed themselves of the subsidy and those who have not) and will have to offer the facility to re-price loans lower to all.
The Housing and Urban Development Corporation (HUDCO) and National Housing Bank (NHB) are empowered as the two Central Nodal Agencies (CNA) to ensure proper implementation and monitoring of the scheme.