Recently we came across an interesting article carried by a leading daily. The article revolved around the "Mortgage Risk Guarantee Fund" (MRGF) that the government plans to set up as a part of the Union Budget 2011 proposal. As per this plan, the MRGF would provide guarantee for the housing loans taken by the economically weaker sections (EWS) as well as the lower income groups (LIG). The government has allocated nearly Rs 180 bn for setting up the fund. The idea behind this fund is simple. It would allow rural people easy access to bank loans for building houses. It is expected to increase the demand for rural housing in the country.
At the face of it, the plan appears to be laudable. But the reason why we found this article interesting is not because it talks of MRGF but because of highlighting the uncanny resemblance between this fund and the infamous Fannie Mae of US. The Fannie Mae was set up after the financial crisis on 1938. The idea behind it was to help local banks and lenders with government money to finance home loans. Fannie Mae created a secondary market wherein it would buy the existing loans of the local banks and provide them with federal money which in turn would be lent to new borrowers. The system worked well till the sub-prime crisis of 2007. The bad loans that Fannie Mae and its twin Freddie Mac had on its books, led them to near bankruptcy. The result was that the US government had to spend billions of dollars to bail the two companies out. The main reason for the bad loans which led to their bankruptcy was that loans were given out to people who did not have the earning capacity to meet their loan obligations.
Unfortunately, the Indian government plans to do pretty much the same thing in India by guaranteeing the loans of EWCs and LIGs. We all know what had happened to the banks when they had to waiver off the Rs 1,000 bn worth of farm loans. Such moves have helped the government in earning votes. But the pressure that these put on the local financial system is huge. All we can do is hope that by guaranteeing a home for all through the MRGF, the government does not end up following US' path to self-destruction.