The urban development ministry has proposed that home loans in the priority sector should be limited to Rs. 5 lakh.

The proposal aims at providing low-cost housing. However, the idea may not find favour with the lenders.

"Although the scheme provides for subsidised funding for housing for the poor, it would be successful only if banks are made to disburse loans to the economically weaker sections," said a government official who asked not to be named.

Currently, loans up to Rs. 20 lakh can be granted under priority sector lending. Banks have been mandated to allocate a certain percentage of funds to some identified sectors, which would otherwise find it difficult to access funds. Such sectors get loans at discounted rates.

In a submission made to the Planning Commission as part of the mid-term appraisal process for the on-going Eleventh Five-Year Plan, the urban development ministry pointed out that an "enabling environment" has to be created for successful implementation of the government's vision of slum-free cities through its flagship scheme Rajiv Awas Yojana.

The ministry is concerned that the current 20 lakh ceiling reduces cash flow to economically weaker sections since banks fear that smaller loans may be waived off. The high limit of Rs. 20 lakhs often lead to banks' avoiding requests for smaller loans.

"If banks are asked to bring down the ticket size of housing loans to Rs 5 lakh, many of us will not be able to meet the priority sector lending targets without a spike in nonperforming assets," said the head of a private sector bank.

As per existing guidelines, banks are required to lend at least 40 percent to certain specific sectors like exports, housing, rural and agriculture sector. A minimum of 18 percent should be allocated to agriculture.

For foreign banks, the priority sector lending has been fixed at 32 percent.