MUMBAI: The World Bank is funding development of new financial instruments for providing home finance to the unorganised sector in the country in the light of the subprime crisis. According to the World Bank, there was confusion that the subprime crisis was caused by loans to low-income borrowers, when actually it was dangerous lending that caused the problem.
Speaking to ET, World Bank senior housing finance specialist Olivier Hassler said, “The subprime crisis is less defined by market group than by the type of lending. The main factor for the crisis was dangerous loans to vulnerable people, when what was required was extra caution and use of risk-mitigating instruments to serve the weaker section.”
The World Bank — which is working with the National Housing Bank and the Monitor Group on developing solutions for low-income housing — has proposed new products. Explaining the specialised product, Mr Hassler said there was a need for a savings-linked product where customers were asked to save before borrowing to discover repayment capacity.
It would also have an insurance to cover delayed payments on account of unemployment or crop failure. The third component of the approach would be credit enhancement that could be in the form of a guarantee fund that could come from the government. Another feature of the loan was that some flexibility would be built in the payment schedule where a decline in revenue would allow them to pay less without creating a negative amortisation.
He said the non-availability of housing finance was the cause of housing shortage. “We hear from developers that because the potential customer does not have access to finance, they do not build for them. People think that housing finance pushes up real estate prices, but it is more complex than that.”
According to Mr Hassler, although weaker sections in the US, Mexico and South Africa were finding it difficult to access finance after the subprime crisis, it has not affected the poor in emerging markets. He adds, although housing finance had picked up at the upper end of the market, it was still to develop in the unorganised sector.
“There are a lot of institutions interested in creating housing finance companies, mostly microfinance institutions wishing to go upmarket. Considering this is a new segment, specialised institutions make sense,” he said.
Mr Hassler said the subprime crisis was driven by investor demand for higher returns.
It was also a regulatory failure. “The main producers of subprime loans were not regulated because the idea was that they were not deposit-taking institutions, therefore there was no systemic risk, when, in fact, there was a huge systemic risk. This was clearly a weakness in the system and the US in the process of mending the structure,” he said.