Dhaval Monani and Anushka Bhansali
India has one of the most mature housing finance markets in the world, but the poor quality of housing is a bane on India’s development. According to the Indian Council for Research on International Economic Relations, India has an urban shortfall of 29 million and rural shortfall of over 40 million homes.
The government’s flagship Pradhan Mantri Awas Yojana (PMAY) scheme has started to address the challenge, facilitating the completion of around 5 million houses since its introduction in 2015. Budget 2022 allocated Rs 480 billion to complete 8 million houses for the 18 million identified beneficiaries under PMAY. Yet, with around 9 million houses grounded, and 11.5 million houses sanctioned as of February, implementation is not meeting expectations.
The PMAY uses different subsidy models such as direct subsidy, indirect subsidy, interest rate interventions, etc., and the total subsidy burden tends to get distorted based on how the data is interpreted. It is important to identify and analyse gaps in the housing finance markets of India in peri urban and rural areas, and mine alternate sources of data.
Under the PMAY-Urban (PMAY-U), the Beneficiary Led Construction (BLC) and Affordable Housing Plan (AHP) are the main models of disbursement since the Credit Linked Subsidy Scheme was phased out over the last two budgets.
The BLC provides a subsidy directly to the beneficiary belonging to the EWS category of up to Rs 150,000. On the other hand, the AHP provides a subsidy up to Rs 150,000 but it can only be availed by pre-approved beneficiaries, and the houses are largely government constructed. In addition to the initial subsidy of Rs 150,000, the state level subsidy adds to this amount and totals Rs 350,000 for the BLC model. However, this amount is insufficient for the beneficiaries to build their houses; therefore, they often dip into their savings, do partial construction or resort to microfinance institutions.
The peri-urban and rural areas are underserved by banks and other financial organisations. Economies on the edge of cities and rural areas are largely informal, with income and outgoings traditionally happening via cash payments, which makes assessing the creditworthiness of an individual difficult. Collection costs for those issuing loans are also high, because payments must be gathered in cash as well.
This leaves microfinance as the only option, but it comes with high interest rates, low loan amounts, and tenures. Microfinance loans currently offer interest rates around 17 percent and rising in these areas according to the CEO of MicroBuild India, a housing finance company that helps low-income families’ access loans for home building. Since most loan seekers cannot afford the high interest rates of microfinance institutions, they are unable to apply for loans and hence, houses remain semi-built.
India’s housing market may potentially be able to leverage digital payment systems to increase urbanisation in peri-urban and rural areas. Ashwini Vaisnaw, the Minister for Electronics and IT, challenged the sector to come up with new ways to harness UPI, given its reach. The COVID-19 pandemic proved to be an inflection point for digital payments, especially in rural India. In peri-urban districts, the volume of digital transactions doubled in 2020. In addition, the volume of transactions further grew by approximately 40 percent in 2021. In contrast, the districts with only urban population saw a decline or a smaller rise in transactions in 2020.
In rural Gujarat, digital payments have trickled down to the most basic of users, including vegetable vendors and hawkers. This reveals individuals’ incomes and outgoings, filling in an opaque picture that will only get more detailed over time, especially if used to offer structured financial products. Furthermore, it throws light on how UPI and digital payment platforms have revolutionised how cash is spent in India.
These platforms offer a unique opportunity for companies to address a huge underserved market by leveraging data to build profiles of customers, and removing the challenge of fragmented markets.
(The authors acknowledge the research support by Sam Downes.)
Dhaval Monani is a Senior Fellow and Anushka Bhansali is an Associate at Artha Global, a policy research and consulting organisation. Views are personal, and do not represent the stand of this publication.
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