Do Housing Loans Really Benefit The Poor?
Governments across the world see subsidized loans as an important part of the strategy to make housing affordable. On the contrary, subsidizing housing loans often do not make housing more affordable for the poor because such policies don't work at the ground level.
Imagine two men applying for a housing loan: Peter and Paul. Peter is hardworking and trustworthy, while Paul is lazy and profligate. While the former believes in honoring his contracts, the latter has an entitlement mentality. When housing loans are offered at a subsidized rate to the poor, it is difficult to distinguish between Peters and Pauls. This is because private banks that risk their own money are more prudent than public banks. But, throughout the world, such dilemmas exist.
India faces a different challenge, because many poor households are not in a position to benefit from the schemes that offer housing loans at a subsidized rate. To begin with, you need assets to use as collateral while applying for a housing loan. Most poor people do not have secure property titles to the assets they own, say, the land on which the house is going to be built. When property titles are not secure or clear, banks are not likely to offer home loans. Poor people also find it more difficult to repay their loans in time. Private banks, for example, will hesitate to lend to a poor person who does not have a steady, reliable source of income. Most poor people are not part of the formal economy.
Even though there is much talk on banking for the poor being done profitable, this has not proven to be easy. Reserve Bank of India governor Raghuram Rajan once said that 75 per cent of the loans that the poor benefit from are informal. They often take a loan when their cycle breaks down, or when their children become ill or for some such reason which is immediate. They approach the local money lender who charges a hefty interest. Authorities try to help the poor by prohibiting the practice of charging hefty interest rates. But, if money lenders are not allowed to lend money at high interest rates, they would not be willing to lend money. This is because the risk of lending to a poor person who is not a part of the formal economy is high. Whatever you think of the ethical aspects of the matter, this is a genuine problem. We will not be able to get around this problem by denying it. Authorities will have to live with the fact that different norms will apply when banks, institutions and people lend to the poor. Moreover, about 60 per cent of the people in India do not have a bank account. Only 10 of the Indians will be able to have access to bank credit. So, even if banks do not want to lend to low-income households, the cost of reaching them is unusually high.
But, there is much that the government can do to ensure that housing loans reach the very poor. It is always good to begin by formalising the property titling system in the best possible way. This is going to be difficult, with the absence of such a system for centuries behind us. But, prosperous nations in the West had done this more than a century ago. This means that it can be done. This itself would solve half the problems. It is also important to have well-developed capital markets, apart from umpteen other ways to open up sources of funding. The poor should also be allowed to sell their farmland or convert it in whichever way they wish, if they prefer to move to urban areas.
Today, we see the spectacle of people who move from rural areas to urban areas move from formal houses to informal houses, or even to the pavement. But, if we allow people to fully utilise the assets we have, they would be able to build houses on their own, and even apply for formal loans.