Can Modi's home-for-all pledge create India's own subprime problem?

Delinquencies are rising in the affordable housing sector, a pet project for Prime Minister Narendra Modi that’s touted as a main growth driver for Asia’s third-largest economy. Most of these were loans below Rs 200,000 ($3,100) made to some of the poorest Indians, whose incomes are now under threat as economic expansion slows.

"Loan defaults have been the largest and are rising in the smaller ticket sizes, creating our own subprime class," said Nilanjan Karfa, analyst at Jefferies India Pvt. "Indeed, default risks could be materially higher in the next one-to-two years."

Indian banks have been channeling increasing amounts of credit to affordable housing after Modi promised to provide a home for every Indian family by 2022. Last February, his government granted developers of low-cost apartments “infrastructure status,” making them eligible for subsidies, tax breaks and easier funding. As defaults rise, the risk is that Modi may be forced to write off these loans before he faces re-election next year.

Pressure Points

"The government’s push for affordable housing prompted more developers to focus on this segment," said Anuj Puri, chairman at ANAROCK Property Consultants.
 

 "In 2017, the majority of new launches were in the affordable and mid-range price segments, with the affordable segment -- defined by homes priced below 4 million rupees alone -- accounting for around 45 per cent of the overall residential supply."

Demand was also spurred by lower mortgage rates, which fell about 300 basis points over the past five years, and smaller increases in property costs. The central bank’s All-India House Price Index grew 8.5 per cent in the year through March 2017, the slowest pace in at least six years.

However, interest rates are probably reversing. Retail inflation breached the central bank’s target last month even as growth is forecast to be the slowest in four years. The economic downturn is hurting job creation and wage growth while rising costs are biting, leading to lower disposable incomes.

Jefferies’s Karfa said state-run banks will probably win more market share from housing finance companies in the coming years, aided by the regulator’s plan to inject a record $32 billion of fresh capital into state lenders over the next two years.

"Disbursals were larger in quantum in the financial year to 2017 and made in a falling rate cycle," Karfa said. "It may not be an exaggeration if underwriting standards were sidestepped in a hyper-competitive housing space. In short, natural seasoning will be exacerbated as interest rates are on their way up, creating greater pressure points for the lenders."