After a gradual start to the financial year, outstanding house loans increased 9.6% to Rs.22.3 lakh crore in the very first nine months of FY21. As the virus spread, more individuals bought homes in smaller cities, leading to the largest rise in home loans in tier-2 and tier-3 cities.
Smaller cities have faster yearly growth rates in house loan books than metros, according to CRIF research. The inexpensive and mid-market segments have seen significant growth. On the other hand, house loans are becoming riskier for banks due to greater default rates among affordable borrowers and younger borrowers.
Why Is Home Loan Growth Higher in Smaller Cities?
The house loan industry in India grew by 11.5 trillion rupees in six years until March 2019. Only in the top 7 metro cities, the loans climbed from 1.8 trillion to 3.6 trillion, while in the rest of India, they expanded from 2.8 trillion to 7.9 trillion. It also showed that small town peripheries grew faster. So, in Chennai, loans climbed by 8%, whereas in Kanchipuram, they grew by 35%.
Requirement for mid-income and inexpensive homes has spurred this rise. Buyers sought affordable houses in suburban areas. Moreover, cheaper land costs, larger land, and integrated facilities drew consumers seeking inexpensive aspirational houses.
Tier-II and tier-III towns provide the next growth potential. It stated 45 districts include major tier-II and tier-III cities that have grown faster than the overall average.
Agro-processing, textiles, diamond processing, tourism, textile, leather, and textile manufacturing are among the industries driving these cities, according to the research. The rise in living conditions has been accompanied by similar improvements in connection, infrastructure, education, and health care.
Differences Between Home Loan Taken in Urban Areas Compared to Rural Areas
Urban and rural areas have criterion differences with a housing loan. These differences are another reason behind smaller towns boosting home loan demands.
The very first step in getting a mortgage is comparing rates. House loans in cities have a higher rate of interest due to high living costs. These banks undertake rural loans (RRBs).
SHB, or Small House Banks specialise in rural housing loans. They offer low-interest loans to help rural development and rural inhabitants’ needs.
Processing costs range from 0.5 to 2%. To encourage higher housing and living conditions in rural regions, many loan products include low or no processing fees. Many institutions provide free door-to-door service in remote locations.
Rural house loans demand a list of documents for a home loan for verification of income and identification and to check all of the home loan eligibility. Agriculturalists must present copies of title land documents and documentation of crops grown on the property to prove land ownership and revenue.
In big cities, loan repayment lengths generally range between 5 to 20 years. Residents have a 7- 10 year tenor limit; however, NRIs do not. But, in the case of rural housing loans, the tenor is between 3 to 20 years. Additionally, early repayment is not penalised in rural areas.
Sources of Credit for Small Towns
There are barely a few options for obtaining credit in rural locations, such as:
- Commercial banks
- Agricultural traders
- Relatives and friends
- Cooperative societies
A moneylender is the quickest and easiest way to get a loan. The convenience is because when borrowing money from such an informal source, there is no need for lengthy paperwork. There is no need for collateral. Against this, banks can be difficult to deal with, with tons of documentation. But they offer more affordable loans, with a lowest home loan interest rate in such small towns.
Strategies That Can Help Home Loan Growth in Small Towns
Small towns and villages across India are trying to improve the home loan market by providing a better standard of living and the opportunity to own local assets. Attractive loans should be tailored to agricultural labourers, planters, horticulturists, and dairy farmers for the purchase of residential land in the rural or urban areas that is currently under construction, new, or existing. Policies to build a home on a rural or urban freehold/leasehold residential plot should be encouraged. If loans are also made available to the self-employed and salaried employees for purchasing a residential property, currently under construction, it might give a further boost to home loans.
The Bottom Line
Residents of towns and villages might utilise house loans to build a home for their families. They can easily obtain a loan to purchase a new house, build a new one, or repair an old one.