Affordable housing's real cost

Easier bank credit to real estate comes with associated risks

Among the headline announcements in the 2017-18 Union Budget was an increase in support for affordable housing. Most importantly, affordable housing was given “infrastructure status”. This means that real estate projects that meet “affordability” norms will qualify, like large public or private infrastructure projects, for easier lending. Under the Reserve Bank of India’s criteria for infrastructure lending, the projects will receive bank loans for longer tenures and at a lower rate of interest. Other changes have also been made; the definition of what constitutes an “affordable” house has been relaxed, for example, to allow larger houses to be categorised as part of affordable housing projects. And the time to completion of such qualifying projects has also been relaxed.

The real estate sector was one of the hardest hit in the period following the government’s announcement that high-value rupee notes were being withdrawn from circulation. This had an unfortunate impact on construction, which is the country’s largest employer of low-skill labour. In India, real estate is generally a cash-intensive sector — and thus can sometimes be a location for money laundering. In general, anything that brings the sector closer to the formal economy — and better access to bank credit is one such — should, of course, be applauded. It is also unquestionably true that India’s target of housing for all by 2022 is a deeply ambitious one. It is particularly ambitious given the sector is struggling with adverse balance sheets. Private participation is likely to be essential if the 2022 target is to be met. But investment in new projects from corporations and conglomerates that are struggling with existing debt is difficult to envisage. It is understandable, therefore, that the government has chosen to ease the flow of credit to the sector, in the hope that it will increase the number of new affordable housing investments. In trading after the Budget, real estate stocks responded positively to the news.

There are, however, some caveats that must be kept in mind. First of all, real estate has traditionally and unfortunately been in India the location of a nexus between politicians, bureaucrats and capital. Such nexuses have in the past helped empty the coffers of state-controlled banks through imprudent lending. Various caps on lending have been mandated by the banking regulator in order to ensure this does not cause systemic risk. Thus, systems will have to be put in place to carefully ensure that lending for affordable housing projects is not siphoned off by promoters to draw down their overall debt. In addition, the projects themselves, if they are to meet the government’s ends, must not start off as affordable housing projects and then be transformed into something else once the credit has been disbursed. The government has tried other methods to revive the sector — from relaxing foreign investment criteria to pushing real estate investment trusts. In many ways, targeting bank lending to the sector is the most risky of these. If the government’s plan takes off, and large numbers of real estate projects are launched with cheap finance, the due diligence and monitoring required will be considerable.