To boost the ailing economy, especially the housing sector, which is currently facing the brunt of the economic slowdown, the Union Finance Minister has announced a string of measures, out of which, the one through which the Government employees will be receiving an advance for building a house will promote the sale of new houses. The lower rate of interest payable by the Government employees on the house building advance, will provide financial support to many first-time house buyers.
Government employees are a highly important constituent of the overall home buyers’ population that contributes towards demand generation for housing and they will be encouraged, through this scheme, to purchase ready new houses in the ever-increasing list of unsold inventory.
Key aspects worth knowing about
The rate of interest on advance for house-building, for the employees of the government, will be reduced and linked with yields from 10-year Benchmark Government bonds (Government Securities), commonly known as G-Sec yields, as the finance minister announced.
The benchmark government bond can be defined as debt security which is issued by the Central or the State Government with residual maturity period of 10 years. These bonds have the backing of a sovereign guarantee. Therefore investors do not face any risk of default. At the maturity of one benchmark sovereign bond, a subsequent bond with the same residual maturity period is issued by the Central or State government and has the most liquidity amongst other similar maturity bonds. When it is fixed, the rate of the coupon does not vary throughout the term of the bond. Only the yield, i.e., the return changes, which is commensurate with interest rates and according to that the cost of the bond also changes. There is an inverse relation between bond yield and the price.
How this will help
There are many projects which are left incomplete because of apprehension of a slow inventory movement of the already completed apartments. The government’s announcement will be followed by the implementation of a special window through which it will offer the last-minute funding for such housing projects which are lying as non-NPA and non-NCLT projects but at the same time qualify as net-worth positive projects in the affordable and middle-income groups. The overall aim is to focus on the construction and completion of incomplete housing units and provide enough incentives for the promoters of such projects to do so as well along with finding a way to incentivize buyers to purchase these houses.
The window for the funding of these non-NPA and non- NCLT projects which are lying incomplete, will be INR 20,000 crore. The fund will be given by the Government of India and approximately the same quantum will be from outside investors. This fund will be managed by experts drawn from the relevant sectors of banking and housing.
More on the special window
This special window for funding of unfinished housing projects would be set up on the pattern of National Investment and Infrastructure Fund (NIIF), that had been set up way back in the year 2016, as the investment vehicle used to provide funds to the green-field, brown-field and other projects that were commercially viable along with stalled projects.
To provide impetus to the housing sector, the government has also announced a policy whereby the guidelines for lending institutions regarding external commercial borrowing (ECB) will be relaxed for the financing of home buyers according to the Pradhan Mantri Awas Yojana (PMAY) scheme.
These schemes follow the earlier announced policy by the government this year, as part of the yearly Budget, whereby it was announced that the additional deduction for the calculation of taxable income for payment of income tax in terms of interest on home loans was raised till 31st March, 2020. This additional deduction of Rs. 1.5 lakh will be applicable for homes worth up to Rs. 45 lakh.
It is now to be seen how all the entities related to the housing sector react to this scheme and derive the proposed benefits out of it. What will be the overall impact of this plan of the Finance Ministry? Trends will be eagerly awaited with Government employees having the potential to bring the housing market back on the right track.