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 India is considering spending 600 billion rupees ($7.2 billion) to provide subsidised loans for small urban housing over the next five years, two government sources told Reuters.

Banks are likely to roll out the scheme in a couple of months, ahead of key state elections later this year and general elections due in mid-2024. Last month, the South Asian country cut cooking gas prices for households by about 18% to rein in inflation ahead of elections.

Indian Prime Minister Narendra Modi announced the plan in a speech in August to mark the country's Independence Day, but its details have not been previously reported.

The scheme will offer an annual interest subsidy of between 3-6.5% on up to 0.9 million rupees of the loan amount. Housing loans below five million rupees availed for a tenure of 20 years will be eligible for the proposed scheme, the sources said.

"The interest subvention will be credited upfront to the housing loan account of beneficiaries. The scheme proposed till 2028 is close to finalisation and will require approval of federal Cabinet," one government official said.

The scheme could benefit 2.5 million loan applicants in low-income groups in urban areas but the quantum of subsidised credit will depend on demand for such homes, the official said.

"We are coming up with a new scheme in the coming years that will benefit those families that live in cities but are living in rented houses, or slums, or chawls and unauthorised colonies," Modi had said in his August speech.

The officials did not want to be named as the scheme is under finalisation.

Mails sent by Reuters seeking a response from the Ministry of Housing and Urban Development and the Ministry of Finance remained unanswered.

Lenders have not been provided any specific lending targets but a meeting with government officials is likely soon, two bank officials said.

Ahead of that, banks have started to identify beneficiaries, they said, adding that the move could help increase lending in the affordable housing segment within the home loan portfolio.

This is not the first time the government has offered interest subsidies to lower-income borrowers in urban areas. A similar scheme ran between 2017-2022 with 12.27 million homes sanctioned under it.