State-Run Banks Explore New Home Loan Model for Informal Income Earners

MUMBAI: Major state-owned banks have begun preliminary discussions to evaluate the potential for offering home loans to individuals lacking traditional income documentation, employer certificates, or tax returns.

Unlike standard disbursements under ‘affordable housing’ initiatives, this new approach would assess applicants’ income through unconventional means, such as examining the transaction activity of a street vendor via QR code payments.

Another proposed method involves estimating the business revenue of a roadside eatery by analyzing customer volume and average bill size.

This proposal is being explored in light of recent Cabinet approval for government support to construct 3 crore homes under the Pradhan Mantri Awas Yojana (PMAY) 2024.

PMAY’s focus areas include slum rehabilitation, credit-linked subsidies for economically weaker sections, and interest subsidies for low- and middle-income groups, along with affordable housing partnerships.

A senior banker confirmed the initial discussions but clarified that “it would be inaccurate to suggest that public sector banks are being pushed by the government to pursue this.”

If implemented through the extensive network of PSU bank branches, such a scheme could boost participation in the central housing programs, which were launched in 2016 for rural and 2015 for urban areas.

However, this would involve banks engaging a new customer segment traditionally served by non-banking financial companies (NBFCs), whose loan approvals have recently slowed due to concerns raised by the Reserve Bank of India over their growth rates. Typically, NBFCs charge 1.5-2 percentage points higher in interest.

“While affordable housing loans may fall under the central scheme, banks usually request some form of documentation, like income tax returns or bank statements, even for low-income applicants,” noted another banker.

“What could be explored now is whether banks could conduct an on-site assessment of income. PMAY has faced some obstacles, like missing documentation and regions where properties are transferred without notifying the lender.”

Some in the banking industry believe a partial government guarantee could be beneficial for loans where formal income documentation is absent.

The Indian Banks’ Association recently discussed this idea, with a source mentioning, “This will require a different strategy. Even with income documentation, banks often face scrutiny on factors such as loan-to-value ratios, which the regulator has capped at 90% for loans up to Rs 30 lakh.”

Just last week, the Cabinet approved the PM-Vidyalaxmi scheme to support meritorious students facing financial challenges in higher education.

Under this scheme, students accepted into ‘quality higher education institutions’ (ranked by the National Institutional Ranking Framework) are eligible for collateral- and guarantor-free loans from banks and financial institutions to cover tuition and other course-related costs.