Propping up the property market – Issues facing Housing Sector

News: Indian housing sector is struggling a lot due to stalled housing projects, which has led to a loss of output and jobs.

What are the problems associated with housing projects?

Fear psychosis among buyers: Customers today are reluctant to pay advances as they are not sure whether the project will complete or not. So, they are willing to pay only for projects that are completed or near completion. Also, they are willing to pay only when the builders have strong financial backing like corporate entities such as L&T, Godrej, and Adani.

Lack of advances: Builders are facing a financial crunch as they need advances in order to complete launched projects and to earn a decent return on their investment.

Disinterest of Banking sector: Banking sector can solve the finance problem. However, banks have been wary of taking exposures to developers even in the best of times.

What did the government do to address the problem?

The government introduced SWAMIH (Special Window for Affordable and Mid-Income Housing) scheme, to address this issue at affordable and mid-income housing projects. It set up a fund with a corpus of Rs 25,000 crore in which the government would contribute Rs 10,000 crore and the rest would come from LIC, SBI, and private insurers.

Although SWAMIH is a helpful initiative, it is limited in size. The problem of stalled projects has been worsened by the ongoing pandemic. According to a survey in 2021,1,73,740 housing units were stalled across six cities (excluding Mumbai). However, SWAMIH covered less than 10% of these stalled and delayed housing units.

What measures can be adopted to solve the housing problem?

Government can implement a Credit Guarantee Scheme for residential housing, on the lines of the Emergency Credit Line Guarantee Scheme (ECLGS) for small and medium enterprises. ECLGS was subject to stringent eligibility criteria to minimize risk. The similar following criteria can be adopted for CGS for housing.

1) Project must involve a certain minimum number of buyers.
2) Applicable to projects that have been delayed by over 12 months.
3) Must be for affordable and mid-income housing.
4) Project must be solvent, which means assets must exceed liabilities.
5) Bank must satisfy itself that there has been no diversion of funds.
6) Bank finance for projects that meet the above criteria should have a graded guarantee by the government, like 100% guarantee for projects that are 90% complete, 90% guarantee for projects that are 80% complete and so on.

CGS will provide a boost to the construction sector, which is a labor-intensive sector. It will provide jobs to people. The government will be able to ease the grievances of a large community of disaffected people with this scheme.

Source: This post is based on the article “Propping up the property market” published in the Business Standard on 14th January 2022.