ECB for low-cost housing may go via NHB

A proposal has been mooted for all external commercial borrowing (ECB) for affordable housing to be routed through the National Housing Bank (NHB), mooted by the latter.

Many in the real estate sector are sceptical about the practicality of the Budget proposal on ECB for this segment. The withholding tax on ECB has been reduced from 20 per cent to five per cent for three years. The argument is that external lenders may not find low income or affordable housing attractive, due to the low profit margins and high risk.

Hence, NHB seems to have suggested itself as a mode for a solution. “It is a possibility we are looking at,” said R V Verma, chairman and managing director, explaining NHB could then channelise ECB for low income housing borrowers. “Since NHB is a recognised entity, external lenders will be comfortable lending to us and we could do aggregate borrowing and aggregate risk hedging,” he explained.

Aggregate lending would provide ‘economies of scale to NHB. “We will ensure that no risk is transferred to the housing sector,” Verma added. And, since the risk would be hedged, it would be a more efficient way of handling the cost of ECB. “It will be consistent with our focus and vision,” he said.

Although developers building low-cost housing could now raise funds from other countries at low interest rates, the road may not be easy for individual borrowers. “There will be a risk-return tradeoff,” said Sachin Sandhir, managing director (South Asia), Royal Institute of Chartered Surveyors, a real estate consultancy. Since the margins for affordable housing are very low, at 20-25 per cent, there would not be too many takers to invest, said Sandhir.

Affordable housing means low profitability. Servicing the foreign debt would be difficult for individuals since rupee remains volatile, said Surinder Chopra, managing director, SCSL Buildwell, a real estate company.

Verma said ECB for individuals will depend on factors like the ratings and relation between borrower and lender. “It depends on what the lender will be comfortable with,” he said.

Since external lenders will not lend directly to a construction company but to a borrower-institution, the role of NHB will be significant. “We will be transferring ECB funds directly to construction companies with low income housing projects. We will have a direct lending window for projects,” said Verma.

“If ECBs are routed through NHB, it would be a good option,” agreed Sandhir.