View: Allowing HFCs access to demand deposits could make home loans cheaper

By Kapil Wadhawan, CMD DHFL

The 2017 Union Budget gave players in the affordable housing sector many reasons to cheer. In keeping with Prime Minister Narendra Modi’s vision of ‘Housing for All by 2022’, which targets building of more than two crore homes for the economically weaker sections and low-income groups in urban locations over the next five years, the government announced a slew of incentives. These included an increase in allocation from Rs 15 thousand crore to Rs 23 thousand crore for the Pradhan Mantri Awas Yojana, extending the time period of project completion from three to five years, and determining benefits based on carpet area instead of built-up area, among others.

One of the most significant announcements was the infrastructure status accorded to the affordable housing sector. Among other things, it allows people at the bottom of the pyramid to have access to cheaper funding for their homes. Owning a home is high priority for most of us and the recategorization of the sector is a step closer to making the dreams of many Indians come true.

The positive sentiment towards affordable housing in India is evident from the spike in demand. Last year, new affordable housing units grew 27 per cent. By 2022, the affordable housing space is expected to turn into a Rs six trillion opportunity. With demands rising, potential home buyers will turn to banks and NBFCs for loans.

The affordable housing sector will be hoping for the streak of positive measures to continue with this year’s budget. More specifically, Housing Finance Companies (HFCs) will be looking for reform changes with respect to raising funds.

For a while now, HFCs have been urging the government to allow them to tap demand deposits of large investors so that they can offer consumers favourable interest rates on home loans. In the current scenario, HFCs face certain funding restraints. This restricts them from offering the best interest rates to consumers. To bridge the gap, the government should permit Non-Banking Finance Companies (NBFCs) to accept large-ticket deposits from high net worth individuals (HNIs). This would work well in to ways — not only will it be another source of funding for NBFCs, but it will also act as a wealth management instrument for HNIs.

Access to demand deposits would mean that HFCs will depend less on institutional money. Their balance sheets will look stronger, allowing them to raise money easily at a lower rate. This benefit of a lower rate can then be passed on to the consumers. With HFCs offering competitive rates, consumers get a wider net to borrow from. The practice of allowing financing entities to accept deposits is common internationally. Challenger banks in the UK are a prime example. HFCs are already servicing retail term deposits of over one year. They are well-equipped to service demand deposits of large investors, too.

For years, HFCs have complemented the banking sector and played an integral role in driving financial inclusion by servicing underserved and unbanked segments. With the government’s push on affordable housing, HFCs have the opportunity to contribute to the building of a new, ambitious India. Expanding the bandwidth of HFCs will effectively lead to a win-win situation for the various stakeholders of the affordable housing sector.

Disclaimer: The facts and opinions written in this column are those of the author and do not reflect the views of

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Via:: Economic times – Wealth


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