Affordable housing finance: India’s next big opportunity

By: Sourajit Aiyer

Everyone agrees that housing is a key multiplier to a nation’s economic growth agenda, given its linkages with numerous ancillary industries. Affordable housing is crucial for a robust property market.

But the experience of countries, especially developing ones like India, shows housing development so far has largely targeted high/mid-income population.

A glaring gap remains in housing for the mid/low-income population – the affordable housing segment. This is the bracket in which most of the population resides.

Home finance disbursements have also largely been targeted to the high/mid-income groups due to easier availability of credit assessment proofs. Ability to raise finance has been tough for the mid/low-income segment and population employed in informal sectors.

However, affordable housing finance is fast becoming a focus area for the governments now, given the objective of financial inclusion.

Taking India’s example, initiatives in recent Budgets include External Commercial Borrowings for affordable housing projects, special refinancing schemes of the National Housing Bank, interest deduction of Rs 0.1mn on loans up to Rs 2.5mn, credit risk guarantee fund scheme and Rajiv Awas Yojna subsidies.

Affordable housing roughly refers to dwellings below a price level of around Rs 2.5mn. This includes the mid/low-income population who are salaried, the self-employed and those employed in the informal sector, whose earnings frequency is uneven. Most are first-time buyers with numerous queries related to the financing process.

There are perceived risks. Nevertheless, most are genuine buyers committed to repaying loans, since they would gladly exit their current housing options – usually consisting of poorly constructed dwellings, with poor sanitation/support-infrastructure and poor social environment for children.

There is already an available buyer base and housing finance companies (HFCs) do not really need to create demand. Characterising the opportunity of affordable housing finance as ‘huge’ would be an understatement. India estimates its national housing shortage at a sheer 19mn.

Monitor Inclusive Markets estimates the shortage for budget homes priced between Rs 0.3-1mn at approximately 22mn and for homes priced between Rs 1-2.5mn at around 5mn. This spells a potential home loan opportunity of between Rs 8tn and 22tn, assuming a lower loan-to-value ratio of 65%-70% since HFCs in this segment might want higher proportional commitment from borrowers given the perceived risks.

While this might be a long term estimate, even if an inventory of 1mn out of this hits the market, it means a potential loan opportunity of between Rs 300bn-800bn. Given that disbursements for smaller ticket sized loans have lagged, the sizable inventory expected to come up indicates potential headroom for growth.

AFFORDABLE HOUSING CONDITIONS

While the thrust towards the affordable home/housing finance is picking up, the success of this sector depends on certain critical aspects.

Efficiency of field-based credit assessment is crucial, more than business development. Affordable housing finance is a sector where the market already exists due to large-scale supply shortage. Hence, creating demand is not the first worry.

The bigger worry is building an efficient field-based credit assessment method, since that holds key to repayment, asset quality and long-term sustainability for the HFC’s loan book.

Risk assessment for salaried clients is quite straightforward. However, the process is complicated for self employed and informal categories. Self employed borrowers do not have consistent monthly income as their earnings are prone to business cycles.

Most in the informal sector may not have proper documents for income/taxation. These people work in diverse areas and the income generation capability of each work is different. Hence, credit assessment processes need to be dynamic.

HFCs here use field-based credit assessment by visiting the client’s place personally to understand the nature of his work, income patterns, monthly commitments, savings flows, his attitude/lifestyle/habits, and to understand the loan’s objective in terms of plot/apartment shortlisted.

The credit officer needs to do cross-reference checks by personally meeting that self-employed applicant’s business customers, suppliers and competitors to gauge the reasonable profit generated by his business. This includes meeting the applicant’s existing creditors to estimate his speed in honouring payments due.

It may also involve using more than one credit evaluator, either for second opinion or for faster turnaround. In short, these field officers should be able to gauge the client’s repayment capabilities and his genuine willingness to repay.

SKILLS AND PROFITABILITY

In a business where the field-based credit evaluation holds the key to estimating the viability of lending to low-income/self-employed borrowers, retaining of quality credit appraisal staff and training of fresh recruits is a major operational criticality.

The experienced credit officers with good strike-rates (in terms of bringing in genuine borrowers who repaid in time) might claim a premium for their quality work, hence salary costs as a percentage of topline needs to be monitored closely for HFCs to maintain profitability.

HFCs might need to benchmark/document the best-practices processes of experienced officers, which can help training the newer, fresh recruits who will typically come at a lower price.