As real estate prices in cities and metros show no signs of coming off the highs and interest rates dampen the appetite for big-ticket home loans, housing finance companies and non-banking finance companies are turning their attention to the low-cost housing segment, where demand far outstrips supply.

The size of such loans usually varies from as low as Rs 1.5 lakh to about Rs 6 lakh. Most of the borrowers belong to the lower income segment, often with no formal or regular source of income, which make it difficult for them to access bank loans.

Such low-cost housing projects are coming up on the outskirts of metros and Tier-II and Tier-III cities where NBFCs have a large distribution network.

Aadhar Housing Finance, a joint venture between Dewan Housing Finance and International Finance Corporation, which was launched a year ago, has operations in Madhya Pradesh, Uttar Pradesh, Chhattisgarh and Orissa. It is looking at sanctions of Rs 80-100 crore in the current financial year, said Mr Harshil Mehta, Chief Executive Officer, Aadhar. “In the six States that we operate in we are looking at a demand of 60 lakh units only in the low-cost segment,” Mr Mehta said.

Muthoot Fincorp, whose mainstay is gold loans, launched a housing finance subsidiary three months back. The company chose to enter this segment as there are not too many players right now, said Mr Thomas John Muthoot, Chairman and Managing Director.

Other entrants include Magma Fincorp, which plans to launch its affordable housing finance business by the first quarter of the next financial year. Another NBFC, S. E. Investments will start its housing finance operations by the second half of next financial year.

Credit assessment

In the low-cost housing segment, credit assessment is a challenge as most of the customers are from informal sectors. “We adopt credit appraisal practices where we train our credit managers to assess loan proposals based on household income and cash flow and not just based on documents provided by borrowers. In several households, the wife adds to the household income through tuitions or tiffin services and this is taken into account,” Mr Mehta of Aadhar said.

As many of the borrowers are daily wage earners, repayment of the loan could also become a problem. To overcome this, Muthoot Fincorp offers a flexible repayment and collection mechanism. Borrowers can repay even in daily instalments, said Mr Thomas John Muthoot.

Supply, a challenge

While there is huge demand for homes in this segment, supply is a challenge. Not just land, even approvals for projects is a challenge. And until approvals are in place, banks or housing finance companies cannot finance these houses, Mr Mehta said.

“By the time the developer gets approvals, often projects are not viable at that pricing. If the Government is clearly focused towards low-cost housing then a single-window approval mechanism can help cut the lead time for developers to launch projects and start constructing. The Government should also encourage public-private partnerships,” he added.

(This article was published on January 20, 2012)
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