Affordable housing dream of millions in India gets closer to reality

RBI's rate cuts and revised lending norms could help a segment that developers have largely ignored

Unsold stock in the affordable housing segment shrank by 19 per cent to about 113,000 units by the end of the first quarter of calendar year 2025. Anuj Puri, chairman of Anarock Group, says there is strong demand but “developers have largely avoided this segment, resulting in minimal new launches in recent years”. Consequently, people are purchasing from the existing inventory. Rising costs of land acquisition, construction and approval have also pushed builders to prioritise premium projects, “as affordable housing offers very thin margins. Furthermore, property prices have soared across cities, exacerbating the affordability crisis.”

 

But things could change after rate cuts by the Reserve Bank of India (RBI) and recently revised affordable housing norms under banks’ priority sector lending (PSL). Per this, in metros (population of 5,000,000 and above), the loan limit will be ₹50 lakh, up from ₹35 lakh with a maximum cost of ₹63 lakh. For geographies with populations between 1,000,000 and 5,000,000, the limit is ₹45 lakh (₹35 lakh) with a maximum property cost of ₹57 lakh. For populations below 1,000,000, it is ₹35 lakh (₹25 lakh), with a maximum property cost of ₹44 lakh. This move is to align affordable housing finance flows to the increase in property costs and inflation.

 

An issue that needs to be addressed is the lack of adequate supply being created in specific markets due to high land acquisition costs, lengthy approval process and construction costs. Amit Diwan, chief distribution officer at Indian Mortgage Guarantee Corporation, feels “further financial support along with single-window approvals will catalyse growth for the industry”. The other variable is the Pradhan Mantri Awas Yojana (PMAY 2.0) Housing for All mission, effective from last September (for urban areas) for 10 million additional beneficiaries. Government assistance of ₹2.30 trillion is being provided with an investment of ₹10 lakh trillion. Families of lower and middle-income groups are eligible to purchase or construct a house under PMAY-2.0 with central assistance of ₹2.50 lakh per housing unit. 

 

The heavy lifting in the segment, especially at the lower end, is done by affordable housing finance companies (AHFCs). This is evident from the National Housing Bank’s (NHB’s) annual report for FY24 (the latest available). Nearly 48 per cent of their loans fall in the category of up to ₹25 lakh. While RBI has upped the cap on PSL-eligible housing loans, it may also lead to a situation wherein banks opt to give more of the higher ticket loans to quickly meet their PSL targets with AHFCs taking on more of the smaller loans in affordable housing.

 

According to a report by Icra, the overall assets under management (including on- and off-book portfolios) for AHFCs grew at a four-year compounded annual growth rate of 25 per cent during FY20-FY24. The growth declined slightly on a high base to 22 per cent (on an annualised basis) in nine months of FY25 with the overall AUM at over ₹125,000 crore as on end-December 2024. Interestingly, despite on-boarding customers with better credit quality, weighted average rates remain range-bound at 14-15 per cent because of rise in systemic interest rates. Loans with longer tenures have higher delinquencies following the rise in interest rates, which have impacted debt servicing capability. Why so?

 

“Lenders extend higher LTV (loan-to-value) loans to borrowers, who as per their assessment have a better risk profile. Thus, for such borrowers, loan sizes are also higher and correspondingly, the tenure is longer,” says A M Karthik, senior vice-president and co-group head (financial sector ratings), Icra. The flipside is that any stress in these loans, either genuine or due to inadequate assessment, shall result in lumpy slippages and lead to elevated delinquencies. “Further, as the LTVs are higher, the borrower's own equity in the asset is low, limiting lenders' ability to recover from overdue with minimal credit losses.” And loan resolutions/recovery from the borrower or via the legal route can take longer.

 

Segmented bad loans data in housing finance is not publicly available; even in NHB annual reports. All we have is a Crisil report of December 2023. It said that in the low-income housing segment — a sub-segment of affordable housing — gross non-performing assets (GNPAs) are higher. This was because of the higher share of surrogate usage, difficulty in credit profile assessment and more self-employed customers led to a higher GNPA ratio of 3.3 per cent in FY23 compared to 1.5 per cent in the regular housing segment.