Urban min wants ‘priority’ only for small home loans

Urban min wants ‘priority’ only for small home loans
The Economic Times, December 17, 2009, Page 9

Amiti Sen & Anto Antony NEW DELHI

THE urban development ministry has proposed that priority sector status for housing loans should be limited to amounts up to Rs 5 lakh to encourage banks to support low-cost housing, but the idea may not find favour with the lenders.

“Although the scheme provides for subsidised funding for housing for the poor, it would be successful only if banks are made to disburse loans to the economically weaker sections,” said a government official who asked not to be named.

Currently, loans up to Rs 20 lakh qualify as priority sector lending. Banks are required to earmark a certain percentage of their funds to some identified sectors, which would otherwise find it difficult to access funds. Such sectors get loans at discounted rates.

In a submission made to the Planning Commission as part of the mid-term appraisal process for the on-going Eleventh Five-Year Plan, the urban development ministry pointed out that an “enabling environment” has to be created for successful implementation of the government’s vision of slum-free cities through its flagship scheme Rajiv Awas Yojana.

It has also suggested that mass affordable housing should be declared as infrastructure to reduce the cost of funds.

The ministry is apprehensive that the current Rs 20-lakh ceiling reduces fund flow to the economically weaker sections, as banks are often fearful of smaller loans that they may be asked to waive off. Moreover, it is also difficult to forfeit mortgage of the poor and the cost of collection is high.

The proposal is, however, likely to be contested by banks, which will need to disburse a greater number of loans to meet their priority sector targets. When the limit for priority sector lending is as high as Rs 20 lakh, banks get away by avoiding requests for smaller loans. They get to meet their priority sector target by sanctioning a smaller number of bigger loans.

“If banks are asked to bring down the ticket size of housing loans to Rs 5 lakh, many of us will not be able to meet the priority sector lending targets without a spike in non-performing assets,” said the head of a new-age private sector bank.

Existing guidelines mandate that at least 40% of net bank loans be earmarked for certain designated sectors, which include exports, housing, rural and agriculture sectors. At least 18% of the net bank credit should be earmarked for agriculture. For foreign banks, the priority sector lending target has been fixed at 32%.

Three out of 27 PSU banks and five out of 22 private sector banks in the country missed the priority sector lending targets. More than half of the banks couldn’t meet the subtargets for agriculture and weaker sections.