Taxpayers shouldn’t subsidise lenders FRANKLY SPEAKING

The government’s home loan interest subsidy scheme has got a big push with the notification of the Prime Minister Awas Yojana meant for middle income households – those with annual incomes between ~6 lakh and ~18 lakh. The scheme is well designed and flexible.

The property should conform to the standards provided for construction and structural safety and should have basic civic infrastructure like water, toilet, sanitation, sewerage, road, electricity, etc. Its carpet area should be less than 969 sq ft (1,184 sq ft carpet area for income between 12 lakh and 18 lakh) to be eligible for the subsidy. The house includes resale houses as well. This translates into a comfortable three-bedroom-hall-kitchen (BHK) anywhere in India.

The lender will coordinate with either National Housing Bank (NHB) or HUDCO to get the one-time subsidy (around ~2.30 lakh) and credit it to your home loan account and the equated monthly instalment amount would be reduced, accordingly.

The conditions: borrower, spouse and dependent unmarried children should not own any pucca house anywhere in India. Household income will be considered for husband, wife and dependant unmarried children only. Except for providing for Aadhaar linkage of borrowers to ensure that the same borrower does not avail of the scheme benefits more than once, there are none of the usual complicated safeguards which end up making such schemes unworkable. Most lenders have already tied up (and competitive pressures will force the remaining lenders to tie up with either NHB or HUDCO) to make sure that their borrowers are able to get the benefit of this scheme. While data is not easily available, but this scheme should easily benefit more than 50 per cent of the home loans currently being sanctioned in India. It is not difficult to envisage that this scheme is going to be a success.

But it gives rise to some concerns: the amount allocated in this Union Budget for this scheme is only ~1,400 crore which will barely cover around 60,000 home loans. That is less than two per cent of all borrowers whereas it is likely that more than 50 per cent of all home loan borrowers are going to be eligible for this subsidy.

Consequently, this scheme may have to be rationed very soon or worse, the scheme design may be made less inclusive to curtail eligibility. Also, home loan lenders are already known to charge higher interest rates to their existing borrowers as compared to new borrowers. Additionally, there are fears that it is quite likely that they will retain a portion of the subsidy benefit for themselves by way of charging higher-than-market interest rates. Currently, when home loan lenders charge higher-than-market interest rates to their existing borrowers, it is profiteering at the expense of its borrowers. After the subsidy scheme is implemented, they will be profiteering at the expense of the taxpayers’ funds.

It is incumbent on the government to ensure that the subsidy should benefit the home buyer and not end up shoring the bottom lines of the lenders. A group of concerned professionals have petitioned the authorities in this regard. You can support the move by signing on the change petition at http://bit.do/rbipetition

Government should ensure that banks don’t use the new interest subsidy scheme to shore up their profits