EMI, not tenure, should be reduced in PMAY

Recently, one of my clients’ son sold his small one-bedroom-hall-kitchen (BHK) flat at Vasai (a far-flung suburb in Mumbai) for ~2.5 million. The buyer, who was a small-time businessman, was contributing ~400,000 from his own pocket, and taking a 20-year home loan for the rest of the amount. The interest rate was 9.25 per cent and the equated monthly instalment (EMI) was about ~19,000 .

When they went to sign the agreement, the buyer mentioned how he was now flat broke as he had used up all his savings to make the downpayment and the EMI burden of ~19,000 made sure that all he could afford was the essentials for the next few years. When he sought my advice, I checked whether he was aware of the Prime Ministers Awas Yojana (PMAY), and using it to get the subsidy of ~235,000 that he was clearly eligible for.

He said that the lender had told him that getting the subsidy would take a little while.

After a month, he was told that the subsidy was received and his loan period would go down by as much as 60 months. That is, the loan would become a 15-year loan from a

20-year loan. When he asked the lender to substitute reduction in tenure by reduction in EMI, he was told that it was not possible.

If given, the EMI would have gone down by as much as ~2,000 per month. When I checked the guidelines issued under the PMAY Scheme, there are some important pointers in point 5.4 of Operational Guidelines issued under the PMAY:

“Subsidy will be credited by the prime lending institution to the borrowers’ account upfront on receipt of subsidy from the central nodal agencies by deducting it from the principal loan amount of the borrower. The borrower will pay EMI as per agreed documented rates on the remainder of the principal loan amount.”

Unfortunately, while this seems to suggest that EMIs should reduce rather than the loan period, the same wordings can also be interpreted as being satisfied if the period of the loan is appropriately reduced. I then checked with my contact at the lender and he confirmed what the buyer had said. Their standard practice was to reduce the loan period rather than the EMI. In fact, he mentioned that they do not reduce the EMI even if the borrower specifically requests for it.

From the borrower’s perspective, there is nothing wrong in what it is doing. But the form of passing on the subsidy is effectively negating any benefit from it. The borrower would see the benefit from the subsidy after 15 long years, even though the government was spending a tidy sum today. This is against common sense. All it requires is for the government to ensure that the benefit is passed on in the EMI rather than in the loan period. The borrowers, and more importantly their spouses, will welcome the substantial relief it will bring to their monthly budgets in this crucial pre-poll season.

In fact, the government should direct the banks to pass on this benefit to all the past cases as well. It will be a bonanza for the middle-class voter. Best of all – it will not cost the government even a single rupee.

Adjusting the credit-linked subsidy by reducing the loan tenure effectively negates any benefit from it