Affordable housing gets out of pocket as costs rise and hurdles persist

Despite policy boosts, land costs and lender parity issues are driving the sector off-script

Is the affordable housing plot going off-script? Jatul Anand, executive director of PNB Housing Finance, says that with 1 million homes sanctioned and an additional 141,000 houses approved under PMAY-U 2.0, the scheme is expected to be the catalyst for sustained growth of the affordable housing sector. PNB Housing has embedded innovations — stepup EMIs, longer loan tenures of up to 30 years and flexible repayment options — that “make it more inclusive, especially for first-time homebuyers and new-to-credit applicants”. 

But the ground reality is different. As Anuj Puri, chairman of Anarock Group, sees it: “Affordable housing needs to be close to transit corridors and job centres, not pushed to the edges of cities, as we are seeing in most of the cases now.” 

The supply-to-demand ratio for affordable housing in top eight cities plummeted to 0.36 in 2025 (until June), down from 1.05 in 2019, signalling a significant undersupply in the segment, according to a report by Knight Frank India in association with National Real Estate Development Council. Launches have collapsed to barely a third of sales, underscoring a deepening imbalance that threatens to impact housing affordability and limit buyer choice. The share of affordable housing under ₹50 lakh stood at 17 per cent, a sharp decline from 52.4 per cent in 2018. 

A unit is classified as “affordable” when priced at ₹45 lakh or less; it has variables to it: In the metros, it is ₹45 lakh or less with the carpet area capped at 60 square metres; in the non-metros, this is at 90 square metres. 

The Reserve Bank of India (RBI) has done its bit by revising affordable housing norms under banks’ priority-sector lending (PSL). According to the norms, in metros (population of 5 million and above), the loan limit will be ₹50 lakh, up from ₹35 lakh with a maximum cost of ₹63 lakh. For places with populations between 1 million and 5 million, the limit is ₹45 lakh (Rs 35 lakh) with a maximum property cost of ₹57 lakh. For populations below 1 million, it is ₹35 lakh (₹25 lakh), with a maximum of ₹44 lakh. This move was to align affordable housing finance flows to the increase in property costs and inflation. 

Matter of risk 

But financing may not be the choke point it is made out to be. It could be in the way it is treated on the books of lenders. A little-known fact is the risk weighting on housing loans based on the lender profile. Currently, non-banking financial companies (NBFCs) have to maintain risk-weights at 100 per cent for housing loans; it is 35 per cent for banks and housing finance companies (or HFCs, a variant of NBFCs). So, while the RBI has upped the cap on PSL-eligible housing loans, it has led to a situation wherein banks opt to give more of the higher-ticket loans to quickly meet their PSL targets with affordable housing financing companies taking on more of the smaller loans. The lower risk weighting further aids banks. 

Then, loan-to-values are higher, meaning the borrower’s own equity in the asset is low, limiting lenders’ ability to recover money with minimal credit losses. Another peeve among HFCs in affordable housing is that they do all the heavy lifting. From locking into this under-served market with little by way of credit histories and taking on high operating costs compared to banks: Arising from field collections to higher “bounce rates” (that is, the percentage of customers with missed instalments; this can be nearly 11 per cent for some firms compared to banks’ 4-5 per cent). 

Left out 

NBFCs are ineligible for refinance from the National Housing Bank. “Mortgage guarantee regulations presently exclude them from availing of risk mitigation via this route,” says Mahesh Misra, managing director and chief executive officer of India Mortgage Guarantee Corporation, even as he makes a case for mortgage guarantee as a compulsory product like in the United States and Canada. Revisiting risk-weighting on housing loans given out by NBFCs, especially for those on the upper and middle-layers, is being argued too because they have the distribution and are regulated in a tighter manner by Mint Road. 

According to A M Karthik, senior vice-president and co-group head (financial sector ratings) at Icra, the harmonisation of risk weights and parity on the access to Sarfaesi (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) for all lenders shall improve credit flow to the affordable housing space. He supports “further access to adequate refinancing, considering the long-tail nature of these assets shall boost lenders’ flexibility”. Digitisation of documentation, property and land records is important as lenders increase their presence in lesser-banked segments. 

 

While banks and NBFCs can finance real estate projects, buying land is a no-go area for banks. Not so for NBFCs. This is because the RBI treats banks differently as they are deposit-taking entities and strictly enforces its sensitive sector exposure norms: To capital markets, commodities and realty. But the position we are now in is akin to what prevailed before Mint Road thought it fine for banks to do merger and acquisition (M&A) financing. NBFCs were always allowed in this trade even as they source credit from banks; it basically amounted to banks financing M&As but a step removed — buffered by another set of regulated entities or REs (read NBFCs) equity capital. 

“Right now, there are extremely hard lending rules at play. Smaller developers who typically focus on affordable housing projects cannot finance land purchases. Such players would certainly benefit from bank-backed land financing so that they can secure land close to transit hubs,” says Puri. His point is this would shorten deployment timelines and also help control pricing.

What you see now in affordable housing is not a lack of demand but affordability. Those in need are getting priced out and there is little in it for realty developers. Affordable housing has to be reimagined.