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Sarbajeet K. Sen

NEW DELHI, March 20

THE housing sector may be lure enough for the private sector banks to shift a greater share of their lending activity to rural areas.

The Government feels that the secret weapon to ensure success of its plan to encourage greater credit disbursal by private banks in rural areas as announced in the Union Budget would be the safety of loans advanced for housing purposes.

"One of the most lucrative areas for private banks' activities in rural areas could be that of housing loan. This would become more attractive once the new credit guarantee scheme becomes operational," a senior Finance Ministry official said.

The credit guarantee scheme is to be offered by a new joint venture company involving National Housing Bank (NHB) and Canadian Mortgage Housing Corporation along with support from a few multilateral institutions. The new company would attempt to insulate lenders from any risk arising out of defaults in housing loans. The structure of the new entity and the guarantee scheme is to be firmed up shortly.

Officials pointed out that backed by the guarantee from the new entity, lenders would be able to provide loans at a much cheaper rate than the already rock-bottom rates that home loans have hit.

Moreover, such loans could also be made widely available since such finance could be extended to even weaker sections once there is back-up support in the event of default.

"There is a large unmet demand for housing in the rural areas. The private banks should be able step in and fill the gap since it would not be a loss-making proposition for them," officials said.

The private banks could also take advantage of the growing business activities in some of the richer rural areas, officials said.

"A larger number of corporates, including multinationals, are spreading their activities to rural areas. The private banks can also focus on them for business," officials said.

In his budget speech, the Finance Minister, Mr Jaswant Singh, had said that the Union Government was not satisfied with the present credit structure where rural loans come cheaper than personal loans such as car loans.

"Subject to Reserve Bank of India's prudential norms and approvals, private bank will hereafter be encouraged to open branches in rural areas to service both farm loans and non-farm sectors there," Mr Singh had said.

However, given the general aversion of private banks to spread their activities away from the urban areas and their tendency to concentrate on the creamy layer of business in cities there have been apprehensions whether the Government would ultimately be successful in cajoling them in spending on infrastructure creation in the rural areas where the business potential is limited according to their internal estimates.

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