Banks' reluctance to rural housing loans is a stumbling block
My colleague, who works with us in Planman Media’s Kolkata office has been struggling with a problem for sometime now. He has been thinking of reconstructing his ancestral home, which is somewhere located in rural Bengal. His struggle emanates from the fact that despite all necessary requisites, to avail a home loan, he is not able to get one, for none of the existing banks are willing to fund him to reconstruct his home where his folks stay. In fact, the same bankers don't have any problems in funding him, if he decides to buy a house in or in the outskirts of Kolkata. It is not that the place he belongs to has no banks, in fact there are a few cooperative banks, who again cannot fund him because his work-place is outside their jurisdiction. What is most amazing is the fact that my colleague, by all banking parameters is creditworthy, be it with respect to his annual package and years that he has worked. Moreover, he is hardly leveraged, as he has no other loans on him, and to top it all, has a decent value of the land on which he proposes to reconstruct his house!
In fact, it doesn’t require intensive surveys or empirical researches to understand the rural housing scenario of the country. A mere walk-through, any village is more than enough to understand the housing plight of rural population. Agreed that housing problem is not just confined to rural areas but then access to proper (easy and fl exible) finance and credit facility is, to a large extent, a luxury of urban Indians only. This is no secret that dearth of income opportunities within the rural parts of the country forces a huge population of rural youth to migrate to cities and towns in search of better jobs and income sources. But then, this prosperity, gained out of better income opportunities, does not trickle down to the rural areas. Just like in the case of my colleague, it has been largely observed that banks are reluctant when it comes to loans for rural housing segments. In effect, the rural housing infrastructure gets no benefits out of increase in income of a migrated youth.
As stated earlier, currently, India has a housing deficit of about 19.4 million units out of which 12.7 million units fall in rural India. With rising income levels, swelling middle income group and brisk urbanisation, it is estimated that additional 50 million housing units would be required within next couple of years. Despite brisk growth in Indian realty sector, India’s home loan to GDP ratio is wedged at a meager 5 per cent. Even in countries with low population, the home loan to GDP ratio is as high as 50 per cent. What's more, of this 5 per cent, almost 80-90 per cent are disbursed for urban residents. Worldwide it has been observed that improvement in rural housing infrastructure has a multiplier effect on the region. And that’s why many countries are pumping money for development of rural housing.
The denial of banks towards rural housing, if on the one hand, is not allowing the flow of money and the related benefits to the rural areas, then on the other hand, it is encouraging mindless urban migration, and at the same time, forcing them into a bigger loan trap. For with lack of options available, the available recourses are either MFIs — who are not only sparse but are short of financial resources, or private money lenders — who charge obscene interest rates, or like my friend — who is finally contemplating to resort to personal loan which is only available at a relatively higher interest rate, and also with lesser payback tenure. For him, it does not matter, as the reconstruction is a dream, which he has been nurturing for years! But then the banks only made it costly!
My colleague, who works with us in Planman Media’s Kolkata office has been struggling with a problem for sometime now. He has been thinking of reconstructing his ancestral home, which is somewhere located in rural Bengal. His struggle emanates from the fact that despite all necessary requisites, to avail a home loan, he is not able to get one, for none of the existing banks are willing to fund him to reconstruct his home where his folks stay. In fact, the same bankers don't have any problems in funding him, if he decides to buy a house in or in the outskirts of Kolkata. It is not that the place he belongs to has no banks, in fact there are a few cooperative banks, who again cannot fund him because his work-place is outside their jurisdiction. What is most amazing is the fact that my colleague, by all banking parameters is creditworthy, be it with respect to his annual package and years that he has worked. Moreover, he is hardly leveraged, as he has no other loans on him, and to top it all, has a decent value of the land on which he proposes to reconstruct his house!
In fact, it doesn’t require intensive surveys or empirical researches to understand the rural housing scenario of the country. A mere walk-through, any village is more than enough to understand the housing plight of rural population. Agreed that housing problem is not just confined to rural areas but then access to proper (easy and fl exible) finance and credit facility is, to a large extent, a luxury of urban Indians only. This is no secret that dearth of income opportunities within the rural parts of the country forces a huge population of rural youth to migrate to cities and towns in search of better jobs and income sources. But then, this prosperity, gained out of better income opportunities, does not trickle down to the rural areas. Just like in the case of my colleague, it has been largely observed that banks are reluctant when it comes to loans for rural housing segments. In effect, the rural housing infrastructure gets no benefits out of increase in income of a migrated youth.
As stated earlier, currently, India has a housing deficit of about 19.4 million units out of which 12.7 million units fall in rural India. With rising income levels, swelling middle income group and brisk urbanisation, it is estimated that additional 50 million housing units would be required within next couple of years. Despite brisk growth in Indian realty sector, India’s home loan to GDP ratio is wedged at a meager 5 per cent. Even in countries with low population, the home loan to GDP ratio is as high as 50 per cent. What's more, of this 5 per cent, almost 80-90 per cent are disbursed for urban residents. Worldwide it has been observed that improvement in rural housing infrastructure has a multiplier effect on the region. And that’s why many countries are pumping money for development of rural housing.
The denial of banks towards rural housing, if on the one hand, is not allowing the flow of money and the related benefits to the rural areas, then on the other hand, it is encouraging mindless urban migration, and at the same time, forcing them into a bigger loan trap. For with lack of options available, the available recourses are either MFIs — who are not only sparse but are short of financial resources, or private money lenders — who charge obscene interest rates, or like my friend — who is finally contemplating to resort to personal loan which is only available at a relatively higher interest rate, and also with lesser payback tenure. For him, it does not matter, as the reconstruction is a dream, which he has been nurturing for years! But then the banks only made it costly!
As far as the high ratio of Home loan to GDP is concerned in the western countries we all know what happened to US economy majorly due to their liberal home loan policy, we are surely better off...
ReplyDeleteI quite liked the article. However, you are talking of a dream, which is yet to come true in India.
ReplyDeleteReasons why this would take longer than expected are simple -
1. Cartelization of the real estate builders, which not only includes the Businessmen, but also the Governemt.
2. Imagine a simple situation - If you can sell your vegetables at a higher price in a super-store, why would you sell it at a local sabji-market? Same is the case here, well Banks know that their main earnings are from urban areas, why would they lend the money at a rural area? It definately adds to their costs to lend money in rural areas.
Now, going forward, with-in 5-6 years I see something better thin this, because of the demand which will grow as well the saturation of the housing sector in the urban areas. Now, this assumption clearly ignore the fact that all the rural areas in India will see an equal demand rise, which can happen only in theory.