Houses with Metro access show better financial discipline: EAC-PM paper

Housing lenders could treat metro connectivity as a mitigating risk factor, argues PM-EAC

Households that have access to Metro rail systems in their vicinity tend to show stronger household financial discipline with lower mortgage delinquency and higher loan prepayment rates, a working paper by the Economic Advisory Council to the Prime Minister (EAC-PM) has shown. 

“When mobility costs decline, households experience improvements in cash-flow liquidity, potentially enabling better debt servicing and lower default risk,” said the paper authored by Soumya Kanti Ghosh, Pulak Ghosh, both part-time members at EAC-PM, and Falguni Sinha, an economist at State Bank of India (SBI). 

Building on previous research based in Delhi, which showed similar outcomes, the working paper has analysed the trend of household financial discipline across Hyderabad and Bengaluru, two cities where Metro systems are largely evolving unlike Delhi, which has a relatively robust Metro system. 

“Our empirical result from Hyderabad indicates that households residing in Metro-served PIN codes exhibit a 1.7 per cent reduction in delinquency incidence alongside a 1.8 per cent rise in prepayment activity. In Bengaluru, the behavioural adjustment is even more pronounced, with delinquency rates declining by 2.4 per cent and prepayment rates increasing by 3.5 per cent following transit expansion,” it said. Evidence from Delhi points to 4.42 per cent reduction in mortgage delinquency alongside a 1.38 per cent increase in prepayments. 

The paper said that improved Metro access has also led to a decline in new vehicle purchases. “Improved subway access leads to a decline in new vehicle purchases, especially in the low-quality and entry-level segments, indicating a substitution away from private transport toward public transit. This reduction in vehicle-related spending frees up monthly liquidity, lowers volatility in household expenditures, and reduces exposure to credit-financed durable purchases,” it said, adding that as a result, households are better able to meet scheduled mortgage instalments, leading to lower delinquency rates. 

While Metro expansions lead to lower mortgage delinquency and higher prepayment rates, such granular financial spillovers at the household level are typically overlooked in conventional project appraisal frameworks, the paper said. 

These results suggest that Metro systems should be viewed not only as mobility or environmental interventions, but also as household balance-sheet stabilisers with implications for credit markets and systemic risk. 

The results also have direct implications for housing finance policy and lender risk assessment, according to the EAC-PM.  “Mortgage delinquency and prepayment are key determinants of lenders’ portfolio risk, capital adequacy, and pricing decisions. By lowering delinquency and default risk, Metro expansions can reduce expected credit losses for lenders operating in well-connected urban areas,” it said. 

This creates a case for incorporating infrastructure accessibility metrics into mortgage risk models, loan pricing, and credit underwriting frameworks. “For public-sector housing finance institutions and priority-sector lenders, Metro connectivity could be treated as a mitigating risk factor, potentially enabling more favourable lending terms in transit-served locations,” the Council noted. 

Through the results, the paper has argued for a more holistic approach towards evaluation of Metro projects in the context of financial sector stability, calling the current approach a systematic undervaluation. “These effects are especially relevant in urban India, where mortgage markets are expanding rapidly and household leverage is rising,” it said.