Housing loans could become cheaper with current estimated monthly installments coming down by 25-30 per cent, thanks to the new mortgage credit guarantee scheme being put in place by the National Housing Bank (NHB).
NHB plans to increase the loan period from the present 10 years to around 25 years, with the down payment coming down from the current 30 per cent of the total cost of the house to around 5 per cent. The average age of owning a house will thus come down by 8-10 years.
NHB will shortly introduce a mortgage credit guarantee scheme for the Indian market which will protect the lending institutions against any default by their borrowers. "The purpose is to enable the primary lending institutions to lend more widely, apply more reasonable standards, not be too conservative and lend in all segments of population and all parts of the country," NHB executive director RV Verma told Business Standard.
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The scheme would be launched by a new subsidiary of NHB which will be a 51:49 joint venture with the Canada Mortgage and Housing Corporation (CMHC). The proposed subsidiary, with an initial share capital of Rs 100 crore, will be set up by April 2002. NHB is also exploring the possibility of participation by other international agencies including International Finance Corporation (IFC) of Washington and Asian Develop- ment Bank.
A presentation of the proposal was made to finance minister Yashwant Sinha on October 23 who has given an in-principle approval to the proposal. The scheme received an in-principle nod from the board of directors of NHB on October 29.
"The housing sector has to be put on a fast forward mode in competition with other sectors. To achieve that, an appropriate institution building in tune with the global best practices has to be adopted and this is an initiative in that direction," Verma said.
The scheme will help expand home ownership in the country and will channelise more investments in housing sector. The sector's contribution to the country's GDP will substantially improve from the present two per cent and would be demonstrated as an engine for growth of the economy.
With such scheme in operation, the 'perceived risk' of loans being converted into bad debts, which restricts the lending institutions to lend to all segments, will come down substantially.
The scheme has been successful in other countries and it has been proved that the lower segments of population are equally credit worthy and safe people to lend to, Verma said.
The scheme will improve accessibility ,availability and affordability for the borrowers. It will result in lowered risk perception and therefore lesser margin requirement and longer tenure of the loan.
The scheme would also give a massive fillip to NHB's initiative on securitisation and development of secondary mortgage market. The default guarantee will act as credit enhancement in the securitisation structure and will soften the transaction cost involved in securitisation. Also, it can be used for meeting the public policy objectives of improving lending in certain parts of the country by providing default guarantee and charging lesser guarantee fee.
The scheme will increase volumes of the housing finance companies and will gel with more stringent prudential guidelines on capital adequacy provisioning and income recognition. HFCs interest will be safeguarded and will be protected against any potential default from the borrowers. The new joint venture will have a mechanism of designating approved lenders and the lenders found eligible will be kept under constant watch.
NHB and CMHC are already collaborating on various initiatives funded by Canadian International Development Agency (Cida) in a bilateral with the Indian government.