Policy Update
Bhavya
Introduction
The National Housing Bank (NHB), through its Refinance Scheme for Construction Finance for Affordable Housing, aims to enhance the supply of affordable housing across India. This initiative provides concessional refinance support to Primary Lending Institutions (PLIs) like Scheduled Commercial Banks and Housing Finance Companies, enabling them to extend construction finance to agencies engaged in affordable housing projects (NHB, n.d.).
According to the Technical Group on Urban Housing Shortage, India faces a shortfall of nearly 18.78 million housing units, primarily in the Economically Weaker Sections (EWS) and Lower-Income Groups (LIG).
The scheme was first introduced by NHB and revised on October 19, 2020, to make it more inclusive and effective amid evolving sectoral conditions.
Background
According to the Technical Group on Urban Housing Shortage (TG-12), as of 2012, India faced a shortfall of 18.78 million housing units, primarily affecting the Economically Weaker Sections (EWS) and Lower Income Groups (LIG). While demand-side schemes like interest subsidies exist, there is a parallel need to bolster the supply side of affordable housing. NHB introduced this scheme to bridge the credit gap faced by public and private agencies in executing affordable housing projects, thereby improving the housing stock and supporting national policy goals like “Housing for All”, specifically under the umbrella of the Pradhan Mantri Awas Yojana–Urban (PMAY–U).
The revised scheme places a greater emphasis on housing projects and aims to stimulate construction activity in Tier 2 and Tier 3 cities. These amendments also promote financial access to developers serving EWS/LIG households.
Functioning
Eligible Institutions and Agencies
Primary Lending Institutions (PLIs): Eligible under NHB’s Regular Refinance Scheme.
Implementing Agencies:
- Public agencies: Housing Boards, Development Authorities, Slum Clearance Boards.
- Private developers/builders: Must be registered companies with 5+ years of experience and a sound financial track record.
Revised criteria require Housing Finance Companies (HFCs) to have a Net Owned Fund (NOF) above ₹500 crores and be eligible under NHB’s Liberalised Remittance Scheme. This threshold ensures that only well-capitalized and financially stable institutions participate in the scheme, given the long-term nature and credit risk associated with construction finance. It aligns with broader prudential norms and reflects NHB’s emphasis on institutional strength and risk mitigation.
Additionally, projects must now hold a credit rating of “Moderate Project” or equivalent from a registered Credit Rating Agency (CRA), typically corresponding to a minimum BBB rating or equivalent, indicating moderate credit risk and adequate financial capacity.
Eligible Projects
Projects must meet one of the following conditions:
- At least 60% of the permissible Floor Space Index or number of units should be for dwellings ≤60 m² carpet area and a cost ≤ ₹30 lakhs.
- Slum rehabilitation projects conform to government-defined parameters.
In revised terms, Affordable Housing is defined as a project where at least 50% of the Floor Area Ratio or Floor Space Index is utilized for dwelling units ≤60 m² carpet area.
Financial Parameters
- Promoter’s Contribution (Private Agencies): Minimum 20% of project outlay.
- Originally 1.33:1; now relaxed to 1.20:1 (i.e., only 20% margin required), expanding the scope of eligible projects. This relaxation promotes greater inclusion by allowing more developers, particularly small and mid-sized firms, to qualify for refinance, thereby enhancing participation in affordable housing delivery. It also reflects NHB’s calibrated approach to managing risk while addressing supply-side financing gaps.
- Long-term Debt-Equity Ratio: Not to exceed 2:1.
- Security: Mortgageable title, project receivables, and escrow mechanisms.
NHB now holds an exclusive first charge over the refinanced housing assets to safeguard its financial exposure.
Terms of Refinance
- Extent: Only the affordable housing portion (as per defined criteria) qualifies.
- Tenure: Co-terminus with PLI loan, maximum of 5 years.
- Rate of Interest: Fixed or floating, linked to NHB’s PLR, provided at concessional rates.
- Repayment: Quarterly installments with interest compounded monthly.
- Prepayment: Permissible with two months’ notice and subject to a levy.
- Exposure Cap: Total exposure to any builder (group) is capped at ₹100 crores to mitigate risks and prevent collusion. This cap is enforced through NHB’s internal credit monitoring systems and is cross-verified across participating PLIs. Builders’ group affiliations and outstanding exposures are tracked through documentation submitted at the time of refinance application and certified by statutory auditors. PLIs are also required to flag and report any cumulative exposure across multiple projects or financial entities under the same group.
- Mandatory Credit Rating: Projects must be rated at least “Moderate Project” by a registered CRA
Disbursement Mechanism
- PLIs apply annually for a refinance limit.
- A single annual limit is sanctioned per institution; sub-limits are not required.
- Disbursement: On request via a prescribed form; routed through RTGS.
- Repayment: Principal and interest to be paid quarterly, regardless of primary loan status.
Statutory Auditors of PLIs must certify that refinanced loans were:
- Utilized exclusively for eligible projects
- Not more than 30 days past due
- Free from any litigation
Impact and Recent Developments
As of June 2024, NHB’s outstanding refinance portfolio stood at ₹1,02,024 crore, marking an 11% year-on-year growth. Under the Affordable Housing Fund (AHF) scheme, ₹7,480 crore was extended to PLIs during FY 2023-24, benefiting approximately 65,000 households across urban and rural areas.
In response to economic challenges and to stimulate rural infrastructure, the Indian government announced plans to increase state subsidies on rural housing by 50%, amounting to over $6.5 billion. This initiative aims to support the construction of an additional 20 million houses over the next few years (Reuters, 2024).
Comparison of NHB Refinance Schemes
| Aspect | Regular Refinance Scheme (LRS) | Affordable Housing Fund (AHF) | Refinance for Construction Finance for Affordable Housing (RCFAH) |
| Purpose | Refinance for individual housing loans for purchase, construction, repairs, renovations, or upgradation | Refinance for individual housing loans in rural and urban areas, with a focus on EWS and LIG segments | Refinance for loans extended to public/private agencies for the construction of affordable housing projects |
| Target Beneficiaries / Criteria | All individual borrowers across India | EWS/LIG households; Women, SC/ST, differently-abled, third gender, rural areas, aspirational districts | Projects with ≥50% FAR/FSI used for housing units ≤60 sq. m carpet area; capped project cost; minimum CRA rating |
| Loan / Project Size Limit | No cap for HFCs/SCBs/SFBs; others have caps (e.g., ₹20–50 lakh) | Individual loans with annual income cap: ₹3 lakh (rural), ₹6 lakh (urban) | Project cost ≤ ₹50 Cr; Loan limit: ₹10–25 Cr based on PLI’s NOF; NHB exposure ≤ ₹100 Cr per builder group |
| Tenure & Interest Rate | 1–15 years; fixed or floating; concessional for priority groups (SC/ST/women/rural, etc.) | Up to 7 years; fixed | Up to 5 years; fixed/floating; interest and repayment terms aligned with LRS; repayment quarterly with certification |
Conclusion
The Refinance Scheme for Affordable Housing Construction plays a crucial role in addressing India’s housing shortage by enabling the development of cost-effective housing solutions. Through strategic financial support and collaboration with various stakeholders, the NHB continues to facilitate access to affordable housing for millions across the country.
The 2020 revisions have made the scheme more inclusive, risk-sensitive, and aligned with national development goals. By lowering asset cover requirements, capping builder exposure, and focusing on small and Tier-II/III projects, the scheme is positioned to bridge key financing gaps and accelerate housing development across income groups.
However, challenges such as delays in project approvals, limited uptake among smaller private developers, and procedural bottlenecks at the state level may affect the pace of implementation. Addressing these through administrative streamlining and capacity-building measures will be key to maximizing the scheme’s impact.
References
- National Housing Bank. (n.d.). Refinance scheme for construction finance for affordable housing. In NHB Scheme (pp. 2–16). https://mohua.gov.in/upload/uploadfiles/files/13RFAffordableHousingFinance.pdf
- National Housing Bank (NHB). (2024). Milestones. NHB. Retrieved May 15, 2025, from https://www.nhb.org.in/about-us/milestones/
- Reuters. (2024, July 3). India plans hike in rural housing subsidies to over $6.5 billion after election setback. Reuters. Retrieved May 16, 2025, from https://www.reuters.com/world/india/india-plans-hike-rural-housing-subsidies-over-65-bln-after-election-setback-2024-07-03/
- Saif, Q. (2020, October 19). Revised refinance scheme for construction finance for affordable housing. Vinod Kothari Consultants. https://vinodkothari.com/wp-content/uploads/2020/10/Revised-Refinance-Scheme-for-Construction-Finance-for-Affordable-Housing.pdf
- National Housing Bank (NHB). (2022). Booklet on Refinance Housing Scheme of the National Housing Bank. Retrieved May 17, 2025, from https://www.nhb.org.in/wp-content/uploads/2022/09/Revised-Refinance-Booklet-26.08.2022english.pdf
- Ministry of Housing and Urban Poverty Alleviation (MoHUPA). (2012). Report of the Technical Group on Urban Housing Shortage (TG-12). Government of India. https://nbo.gov.in/pdf/urban-housing-shortage.pdf
- National Housing Bank. (2022). Revised refinance booklet – 26.08.2022. https://www.nhb.org.in/wp-content/uploads/2022/09/Revised-Refinance-Booklet-26.08.2022english.pdf
About the Author: Bhavya is a research intern at IMPRI Impact and Policy Research Institute, a third-year undergraduate pursuing a double major in Economics and Sociology at Christ University, Bangalore, Central Campus.
Acknowledgment: The author thanks Ms. Aasthaba Jadeja, internship coordinator, for her guidance and support.
Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.
Read more at IMPRI:
Mission Vatsalya, 2021: India’s Flagship Child Protection and Welfare Scheme
