NHB home loan interest cap of 10.75% to safeguard interests of Priority customers
The National Housing Bank (NHB), the wholly owned subsidiary of the Reserve Bank of India (RBI), which supports the housing finance sector has set a cap on the lending rates for specialised mortgage lenders such as LIC Housing Finance, which are dependant on the NHB for seeking refinance. This measure by the NHB comes at a time when interest rates are rising due to the economic instability that is prevalant in India. It is presumed that this move was taken with an eye on the impending elections, as in the case of various other bills that were passed in Parliament during the monsoon session like the Food Bill, the Land Acquisition Bill and the Pension Bill, thereby resulting in increased direct cash transfers.
The move by the NHB to provide a cap on lending rates on home loans at 10.75% for economically weaker sections has been widely welcomed. The housing finance regulator has made this cap applicable only to specialised Housing Finance Companies (HFC). However, banks will still provide home loans to the targeted segment at the base rates. The targeted segment which consists of borrowers with a household income of less than Rs. 4 lakh per annum would benefit under this provision of this dedicated rural and urban housing scheme provided by the government.
Specifics of the RHF scheme proposed by NHB:
The NHB had earlier formulated a scheme called the Rural Housing Fund (RHF) in 2008 for lending loans towards rural housing by people who would fall under the category of economically weaker sections as per the guidelines defined by the RBI on the priority sector lending. According to the guidelines, the categories under which the weaker sections fall include small and marginal farmers holding less than 5 acres land, individuals eligible for loans under Swarnjayanthi Gram Swarozgar Yojna (SGSY), scheduled castes and scheduled tribes, and persons from minority communities as notified by the government of India. As per the scheme, a rural area falls under the category which is a village or town with a population of not more than 50,000 people.
Refinance facilities provided by NHB to PLIs:
It is the responsibility of Primary Lending Institutions (PLIs) to utilize the refinance facility provided by the NHB so as to provide need-based housing loans to those who fall under the targeted category. The NHB provides refinance facility to PLIs to finance many direct and indirect loans. Some of the direct loans for which refinance is provided include housing loans upto Rs.15 lakhs that HFCs can disburse to individuals, that include new housing construction as well as extension and renovation work, for which the cap is Rs.5 lakhs. This includes water and sanitation component as well as housing infrastructure component. NHB refinance is available to the extent of 100% of the housing loan, with a repayment period not exceeding 7 years.
Subsidised refinance rate to lenders:
Another important provision that the NHB is providing is to offer subsidised refinance at the rate of 8.25-8.75% to lenders. This will enable the lenders to earn an interest spread of 200-250-bps. This is contrary to the normal practice that the NHB follows where it provides refinance at an interest rate of 9.8-10%. By setting a ceiling on the interest rate, the objective of the NHB is to transfer the benefit of the concessional funding to the actual borrowers of the loan. This ceiling on interest rates was fixed by the NHB after valuable inputs received from the government as well as the RBI.
