ICRA must take note of wannabe home loan borrowers without income proof

The accredited Indian rating agency, ICRA, in its report on housing finance says that the mortgage penetration in India remains frozen at 8 percent but could leapfrog to 16 percent in three years if meaningful steps are urgently taken. In India, telecom penetration at upwards of 60 percent, is by far the biggest growth segment thanks to affordable hardware (handsets) and software (telecom and internet services). While this is heartening, insurance and mortgage penetration, both at below 10 percent, hold out important lessons for our policy wonks though in this article the focus is only on the latter.

Incidentally, too much is being made of the recent 50 basis points repo rate cut by the RBI which the SBI has allowed faithfully to transmit down by immediately announcing a 40 basis points rate reduction on home loans. While this will definitely make life easier for the existing borrowers making EMI payments, there is little to suggest that wannabe home owners would start flocking the home loan finance companies and banks because if interest rate is the be all and end all of their quest, they would in any case plump for flexible rates as opposed to fixed rates.

Be that as it may, home loans which grew at a healthy 18 percent CAGR in 2014, grew only at 15 percent CAGR in the first half of 2015 (source ICRA) testifying, howsoever tangentially, to the fact that the wannabes first need purchasing power more than anything else including rate cuts. The economy has been stagnating, with growth and employment refusing to pick up.

ICRA draws attention of the policymakers to a depressing Indian reality – all home loan takers are in the organised sector. Indeed the home loan market has passed the unorganized sector by. These are petty, medium and big shopkeepers besides those working in small and cottage industries untouched by government rules and regulations. They have no income certificates to boast, the single most document the home financiers set store by.

Sadly, by the very nature of their own or their employers’ sub-rosa operations, they cannot produce income tax return or employer’s salary certificate insisted upon by home financiers. This is not to blame the home financiers in India who unlike their US counterparts refuse to give home loans to the NINJA category (no income, no job, and no assets). The 2008 financial crisis was in substantial part triggered by this reckless lending practice in the US. Mortgage was deemed sufficient and not the repaying capacity. We India set store more by the repaying capacity, with HDFC typically taking 30 percent of take home salary as one’s repaying capacity by way of EMI. This is as it should be but the fact remains that the wannabes have been left high and dry.

The PMO’s directive to EPFO to invest 15 percent of its funds in low cost housing sounds hollow in the face of this depressing reality about the wannabes. Low cost houses are essentially meant for them but they will be appropriated by the well-heeled. Banks which now account for 37 percent of the home loans (source ICRA) must take the initiative and ferret out the true income of the wannabe home loan seekers through means other than income tax return and employer’s certificate with the assurance that such information gleaned would not be handed over to income tax authorities.

Modi’s assurance to the poor that they all will all have their own homes by 2022 to live in would remain a pious wish unless the system meets the poor wannabes halfway by relaxing the rigor of income proof. Tinkering with interest rates and tax concessions at best addresses the city middle class concerns.