Government signals to interest subsidy to make home loans cheaper

An anonymous senior government official told that government is thinking of a proposal to make home loans cheaper for consumers through interest subsidy, with an aim to encourage demand in the realty sector which has a sequel effect on many industries like cement and steel.

In the proposal there will be provision for providing loans at below market rates to real estate developers. But the loan to be disbursed under this will have a number of conditions like an upper ceiling on selling price of flats and individual homes.

The entry limit for loans will probably be around Rs 10 lakh, as it is expected that nearly 75 per cent of the housing loans will be below Rs 7.5 lakh. Only developers who own the land or already are in the middle of a housing project will be eligible for the government subsidy. An official informed that individual planning to construct homes on their own would also be eligible.

The panel of secretaries headed by Finance Secretary Arun Ramanathan has given a suggestion to the urban development ministry to prepare a note in this regard and present it to the apex committee headed by Prime Minister Manmohan Singh.

The apex committee has the authority to take the final decision on the proposal. A senior government official said, “Discussions were held on this proposal which includes making available loans at around 8 per cent interest rate, which could remain fixed for a period of around five years. The government will pay for the balance interest amount”.

In the last one year the interest rate charged by commercial banks in India has risen sharply, while the prime lending rate of certain banks has increased above 14 per cent as against around 9 per cent a year ago. This has deterred many home buyers to postpone their home purchases and also increased loan repayment amount.

Therefore to avoid a repeat of sub-prime like crisis in India, credit worthiness of borrowers will be scrutinized as in normal loans.

Debate on this measure is being done to ensure that the demand in the economy does not slow down. According to the sources, “If the housing sector does not kick off in the next two to three months, it could have a domino effect. Currently, most housing projects are stuck because of the liquidity crunch. A boost to this sector will mean additional demand for cement, steel and other material, which is likely to stimulate the economy. Moreover, it would also ensure that jobs in the sector are not lost”.

As per analysts views nearly 80 per cent of the total real estate demand get instigated from the housing sector. It is believed that by 2010, nearly 530.5 million square feet of residential space will be developed in the premium category alone in seven major cities, which indicates to the supply of 200,000 units per year in the middle income group (MIG) and high income group (HIG) segments.

According to Indicus Analytics estimation between 2008 and 2015, 17 million additional dwelling units will be needed.