The government finally announced the operating guidelines for the Credit Linked Subsidy Scheme for Middle Income Group (CLSS for MIG), in which the eligibility criteria for borrowers is surprisingly quite inclusive than anticipated. However, despite the inclusion of higher income groups and substantially increasing the eligible dwelling carpet area the scheme appears more lucrative for borrowers in the affordable category. We are unsure of the recipients of the government’s intended push for affordable housing, however, for smaller housing finance companies this could well provide some support to otherwise sagging transaction volumes.
* Eligibility criteria more inclusive than anticipated:
The borrower eligibility criteria under the CLSS for MIG I and MIG II schemes include households with income and dwelling unit carpet area of Rs0.6mn-Rs1.2mn / 90sq.m. and Rs1.2mn-Rs1.8mn / 110sq.m respectively. In our view, the eligibility criteria is more inclusive than anticipated and can potentially cover a large number of households under the scheme. Although the subsidy benefit (4% for loans up to Rs0.9mn and 3% for loans up to Rs1.2mn) remains unchanged from what was initially announced, the beneficiary can avail such benefit (up to prescribed limits) on loans higher than the prescribed limits, which offers flexibility to the borrower and reduces the overall cost of borrowing even on higher loan amounts.
* Subsidy benefit to be upfronted to the borrower:
The scheme is designed in such a way that the entire benefit of the interest subsidy is credited upfront to the borrower, which translates into effectively reduced housing loans and thereby lower EMIs. This increases affordability on the part of the borrower by reducing the cost of ownership of the house and hence is aimed at inducing demand for housing units.
* Making lenders list inclusive too:
As compared to the initial CLSS scheme announced last year the eligible lenders list now includes Small Finance Banks (SFBs) and NBFCMFIs, in addition to Scheduled Commercial Banks, Housing Finance Companies (HFCs), Regional Rural Banks (RRBs) and Urban Co-op. Banks. National Housing Bank (NHB) and HUDCO have been identified as two Central Nodal Agencies (CNAs) for channelizing the subsidy to lenders.
* Making loans affordable to push affordable housing:
In our view, to push its agenda of making affordable housing a success the government has taken a two pronged approach. While on one hand the government has increased the budgetary allocations towards increasing the affordable housing supply, on the other hand it is trying to pass on the benefits to the end-user, which would effectively reduce the cost of ownership. However, given the supply side constraints on the affordable housing side, the government appears to be creating demand by making loans more affordable in that segment.
*Benefits skewed towards affordable housing segment:
Our analysis suggests that although the subsidy benefit lowers the effective cost of borrowing for all the borrowers, higher benefit would accrue to borrowers at the lower end of the spectrum. As per our analysis, under the CLSS for MIG schemes the benefit of the subsidy for the stipulated loan amounts (affordable category) can reduce the effective equated monthly installments by 20%-30% vs. just 5%-15% benefit for borrowers with higher loan amounts. We believe this augurs well for banks and HFCs focused on the affordable housing category in the medium term as restricted supply in this segment may not result in higher volumes on an immediate basis. Within our coverage universe, we leave our earnings estimates unchanged for LIC Housing Finance and HDFC Ltd and maintain Hold. Smaller HFCs can potentially benefit more from the current move given their lower ticket sizes and smaller market shares. However, the valuations are demanding
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