Banking Article, Banking Finance 2020, Banking Finance March 2020

Subsidy in Retail Loans

What is Subsidy?

A subsidy or government incentive is a form of financial aid or support extended to an economic sector (or institution, business, or individual) generally with the aim of promoting economic and social policy.

What is Retail Loan?

Structured products packaged to meet the specific needs of individual customers. Loan given to ultimate consumer is Retail Loan. Housing Loans, Vehicle Loans, Education Loans, Mortgage Loans, Personal Loans etc. are few examples of Retail Loans.

Which Retail Loan Schemes are eligible for Subsidies?

Among the various Retail Loan Schemes, two Retail Loan Schemes are eligible for the Subsidies they are Education Loan & Housing Loan. The Subsidies in these two Retail Loans are as follows:

Central Sector Interest Subsidy Scheme, 2009 on Education Loan

One of the major objectives of the Government is to ensure that no student is denied the opportunity to pursue higher education because he or she is poor. To achieve this objective, Ministry of Human Resource Development (MHRD) launched a Scheme titled “Central Sector Interest Subsidy Scheme” (CSIS) in 2009. Under this Scheme Interest Subsidy is given for the Course period + Moratorium period i.e. Course period plus one year or six months after getting job, whichever is earlier on Education Loan taken from the Scheduled Banks under the Model Education Loan Scheme of Indian Banks Association to students belonging to economically weaker sections whose annual parental income is up to Rs. 4.5 Lakh from all sources. The subsidy is allowed for undergoing recognised Professional/ Technical courses only from NAAC accredited Institutions or professional/ technical programmes accredited by NBA or Institutions of National Importance or Central Funded Technical Institutions (CFTIs). Those Professional Institutions/programmes, which do not come under the ambit of NAAC or NBA, would require approval of the respective regulatory body viz, approval of Medical Council of India for Medical courses, Nursing Council of lndia for Nursing courses, Bar Council of India for Law etc. This subsidy is allowed only once either for undergraduate or post graduate or integrated course. The Nodal Bank is Canara Bank.

The Scheme started from the academic year 2009-10 starting 1st April, 2009. The loan amount taken starting from the Academic Year 2009-10 (irrespective of the date of sanction) were only be covered under the scheme of interest subsidy. Interest on any amount disbursed for courses starting before the academic year 2009-10 had not being considered for subsidy. The Modified Scheme is applicable from the academic year 2018-19, starting 1st April, 2018.

The disbursement of interest subsidy claims to the Banks is done on half-yearly or yearly basis. RRBS should submit their claim directly to Canara Bank, the nodal bank and not to route it through the sponsor bank.

Under the IBA Scheme, 1% interest concession is provided for the loanees if the interest is serviced during the period when repayment holiday is specified for interest repayment under the scheme. This 1% interest concession would be extended under the Central Scheme of lnterest Subsidy, provided the Government of lndia disburses interest subsidy claims to the Banks on half-yearly or yearly basis.

Pradhan Mantri Awas Yojana-Housing for All (Urban)

The Mission will be implemented during 2015-2022 and will provide central assistance to Urban Local Bodies (ULBs) and other implementing agencies through States/UTs for:

  1. Rehabilitation of existing slum dwellers.
  2. Credit Linked Subsidy
  3. Affordable Housing in Partnership
  4. Subsidy for Beneficiary-led individual house construction/enhancement.

Credit linked subsidy component will be implemented as a Central Sector Scheme while other three components will be implemented as Centrally Sponsored Scheme (CSS). The government has been trying to support the cause of housing, through its ‘Housing for All by 2022’ mission. Under this mission, the government has come out with two schemes, to partly fund the interest of the borrowers in urban areas. The first scheme, which is very liberal in terms of the interest rate subsidy, is applicable to the Economically Weaker Sections (EWS) and those under the Low-Income Group (LIG). The other scheme covers the Middle-Income Group (MIG).

Eligibility criteria in PMAY, for availing of the subsidy on interest on home loans

The eligible category is divided into three parts – the first category is EWS the second category is LIG and the third category is MIG. This scheme is available for acquiring or constructing residential units in the 4,041 statutory towns as per the 2011 census and 274 additional towns, which have separately been notified by the state government. The details of such towns can be downloaded from http://nhb.org.in/government-scheme/pradhan-mantri-awas-yojana-credit-linked-subsidy-scheme/statutory-towns. In order to qualify for the subsidy, the individual or spouse should not own an all-weather pucca house, either in his/her name or in the name of any unmarried child of the couple, in any part of India. In addition to acquisition or construction of a new house, a borrower can also avail of this facility for extension of his existing house, whether self-acquired or inherited. If the borrower wants to avail of the benefits, for extension or enhancement of his existing house for addition of rooms, kitchen, toilet, etc., then, the condition of pre-existence of a pucca house, shall not apply.

Moreover, the income for the purpose of qualifying under the scheme is the income of the whole family as a unit and not of the head of the family only. For availing of the subsidy, the borrower has to submit a self-declaration, about the income and title of the property to be acquired, to the lender. As the government does not underwrite any part of the loan given under this scheme, lenders will have to follow their own due diligence process, for income and title of the property. The lender has to monitor the construction of the dwelling units financed under the scheme, like approvals for the building design, infrastructure facilities, the quality of construction, etc. The lender also has to verify the expenditure incurred up to different stages of construction, through site visits, etc.

So, the government will only provide the subsidy for such loans but the lender has to take all the other precautions, which it takes for any other regular home loan, as any non-payment or the loan becoming a non-performing asset; will be on the bank’s books. The house which qualifies for the interest subsidy can either be a single unit or a unit under any multistoried building. The eligible unit needs to have basic facilities and infrastructure like toilet, water, sewerage, road, electricity, etc. The area of the house will only include the area on which a carpet can be laid, meaning that it will not include the walls in the house or the outer wall of the house. The house to be constructed or acquired under this scheme, should be in the name of the female head of the household or alternatively, in the joint name of the male head of the household and his wife. However, if there is no adult female member in the family, the house can be acquired in the name of the male member of the family.

The income eligibility and rate of interest subsidy available and the exact quantum of benefits is tabulated as under:

Particulars EWS LIG MIG I MIG II
Annual family income Upto Rs 3 lakhs Above Rs 3 lakhs and upto Rs 6 lakhs Above Rs 6 lakhs and upto Rs 12 lakhs Above Rs 12 lakhs and upto Rs 18 lakhs
House area (Carpet Area) Upto 30 sq metres Upto 60 sq metres Upto 160 sq metres Upto 200 sq metres
Rate of interest subsidy 6.50% 6.50% 4% 3%
Maximum loan eligible for subsidy Rs 6 lakhs Rs 6 lakhs Rs 9 lakhs Rs 12 lakhs
Subvention Amount Rs. 2.67 Lakhs Rs. 2.67 Lakhs Rs. 2.35 Lakhs Rs. 2.30 Lakhs
Net Present Value 9% 9% 9% 9%
Maximum loan tenure 20 years 20 years 20 years 20 years

The maximum subsidy under this scheme can be Rs 2,67,280. The amount of subsidy will be reduced proportionately, if the loan amount is lower than Rs 6 lakhs. The subsidy benefit is only available for loans that are disbursed on or after June 17, 2015.

How is the subsidy under PMAY given?

The subsidy under this scheme is given as upfront relief, in the form of a reduction in the overall loan liability. The present value of the interest subsidy is calculated at 6.50%, for a maximum tenure period of 20 years, on the maximum loan amount of Rs 6 lakhs. The future outflow of interest at 6.50% is discounted at 9% and the present value so arrived, is reduced from the actual loan amount taken by the borrower. The amount of original loan reduced by the net present value of the subsidy benefit is the liability of the borrower and the EMI is computed accordingly, based on the agreed rate of interest. In case the borrower borrows more than Rs 6 lakhs, the amount of subsidy shall be restricted to an amount of Rs 6 lakhs and the additional loan shall be charged regular interest rates of the bank. Although the lender has to give the credit for the subsidy to the borrower immediately, the lender gets the amount of interest subsidy, only after the claim made by it is processed by the nodal agency with which it is registered. This is the main reason why lenders are not keen to promote this beneficial scheme of the government.

Under the scheme, the lenders have to register themselves with one of the nodal agencies – NHB or HUDCO. The lender institutions include various entities engaged in the business of providing home finance, such as scheduled banks, housing finance companies, regional rural banks (RRBs), state cooperative banks and urban cooperative banks. It will also include small finance banks and NBFC- micro finance institutions. Additionally, the government can notify other institutions, to be eligible to provide finance under this scheme.

Processing fee for loan applications, under PMAY

Under the scheme, the lender is not allowed to recover any processing fee from the borrower. So, in addition to reimbursement of the subsidy amount, the lender will also be given a lump sum of Rs 3,000, to cover their cost of processing the loan application for an amount upto Rs 6 lakhs. For additional loan beyond Rs 6 lakhs, the lenders are allowed to recover normal processing fees.

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