State Banks Look for New Evaluation Model for Home Loans in Informal Sector

The shift in lending practices, several large state-owned banks are contemplating a new route to extend home loans to individuals in the informal sector, who typically lack the conventional documentation required for traditional loan assessments. This initiative comes as the government intensifies its efforts under the Pradhan Mantri Awas Yojana (PMAY), aiming to meet its ambitious goal of constructing 3 crore homes by 2024.

The proposed approach diverges from the standard process typically used for affordable housing schemes, where income documents like tax returns or employer certificates are mandatory. Instead, banks are exploring alternative methods to assess borrowers’ financial capability. One such idea involves analysing transaction volumes via digital payment methods, such as a street vendor’s QR code receipts, or estimating the revenue of small roadside eateries based on customer traffic and average billing. This shift could revolutionise home loan accessibility for millions working in India’s vast informal economy, offering them an unprecedented opportunity to own a home.

The scheme comes at a critical juncture when the government is ramping up housing schemes for both urban and rural areas, with the PMAY focusing on economically weaker sections (EWS) and low-income groups. However, these borrowers often face challenges in proving their income, a hurdle that has slowed the disbursement of loans and limited their access to affordable housing.

A senior banker, while confirming that discussions are underway, clarified that these innovations were not the result of government pressure but stemmed from a broader push to enhance financial inclusion and cater to the underserved population. The strategy aims to bring a segment of the population that is primarily reliant on non-banking financial companies (NBFCs) under the fold of state-owned banks. These borrowers often face higher interest rates of 1.5-2 percentage points when dealing with NBFCs, making state-backed loans a more attractive option.

Despite the potential, implementing such a scheme poses challenges. One banker noted that while alternative income verification methods could help streamline the process, regulatory considerations, such as loan-to-value (LTV) ratios, would need to be addressed. Current rules stipulate that the LTV for loans up to Rs 30 lakh must not exceed 90%, which could be difficult to meet when income verification methods are unconventional. There is also the possibility of incorporating a government guarantee for loans where formal documentation is unavailable, offering some degree of security to banks.

From a sustainability standpoint, this initiative addresses both financial inclusion and urban development goals. The need for affordable housing is increasingly urgent in India, where millions still live in substandard conditions. By leveraging technology and innovative assessment methods, state-owned banks could significantly expand homeownership opportunities for a vast section of the population. This approach could also ease the burden on non-banking financial institutions, which have faced regulatory scrutiny due to rapid growth and rising loan defaults.

Ultimately, this new model could contribute to sustainable urbanisation, where affordable housing is no longer an unattainable dream for millions of Indians. As banks explore these new avenues, the hope is that they will help bridge the gap between traditional banking systems and the informal sector, ensuring more equitable access to home loans and  long-term financial security for the underserved.