A roof for every budget

Jharna (name changed) is an orchestra dancer in Panvel, Navi Mumbai. The 32-year-old works night-long as she desperately needs the money to raise her two daughters. Apart from educating them, she is anxious to shelter them from the lifestyle associated with her line of work. But when she set out to buy a house in a suitable locality, she found the going tough because of her status as a single mother working in an unorganised sector, with no income tax returns or salary certificates to show. In fact, the legality of her profession is under a cloud, owing to attempts by various governments to ban the so-called ‘dance bars’ of Mumbai. After banks continually turned down her request for a housing loan, she approached a housing finance company, which lent her money. She now owns a house in Karjat, about 100 km from Mumbai. Her daughters live there with her mother and study at a nearby school. Paying off the monthly instalment of ₹8,000, Jharna hopes to give her children a better life.

In Fort, one of Mumbai’s oldest business districts, Jaya Poonary has been working as a delivery boy with the New Udipi Restaurant for the last 25 years. Most of the customers dial Poonary, and not the restaurant, when placing their order. He gets 12 per cent of the order size as commission. Though not earning a fixed salary, Poonary has bought a house in suburban Kalyan, where he now lives with his family. It was the Micro Housing Finance Corporation (MHFC) that came forward to lend him ₹7 lakh. Poonary is glad that instead of a monthly house rent, he is paying the loan instalment of ₹6,500 and is the owner of a property.

The housing shortage in the EWS (economically weaker sections — annual household income up to ₹3 lakh) and LIG (lower income groups — annual household income of ₹3-6 lakh) categories was estimated at 18.78 million units in 2012, while the Economic Survey 2015-16 put it at 20 million. If not addressed, this shortage is likely to touch 30 million by 2020.

In a country where the urban poor are forced to live in slums despite having regular incomes, while the government wants to ensure “housing for all”, a new breed of financial institutions has cropped up to bridge the gap.

A business-in-waiting

“We are giving loan to people without documentation. Nearly 90 per cent of our customers work in the informal sector,” says Rajnish Dhall, the chief executive officer and managing director of MHFC.

He co-founded the company in 2008 after realising there was nothing in the space between microfinance institutions (MFI), which lend to the poor only for economic enterprises, and the banks, which offer housing loans only to those in the formal sector.

“Our audience is the same as that of MFIs, but our product is the same as that of banks,” says Dhall, who left his job in American Express Bank to work in the social sector. MHFC had over 7,000 customers in March 2016 and only 35 have defaulted so far. That makes for 0.5 per cent of non-performing assets (NPAs), something that only the biggest banks can boast of.

Gagandeep Bakshi, director and head of investment banking at Intellecap, says that a huge opportunity awaits those who can develop a sustainable business model in lending to the informal segment of the population. “We are helping companies raise funds and also helping microfinance companies diversify their product avenues to include affordable housing,” he says.

At last count, there were 85 companies countrywide in the business of lending to lower-income housing. Their combined business was pegged at nearly ₹11 lakh crore.

The scenario is not so hopeful in rural India, where housing development is under the rural development ministry, which is currently unable to focus its energies on this vital sector. With housing taking a back seat, farmers, small artisans and traders are forced to live in kutcha houses and are unable to expand or refurbish existing dwellings. Despite having regular incomes, they are unable to access loans in the absence of formal land documents or income proofs.

Loans that seek rural customers

Housing finance companies in both urban and rural areas have devised a unique business model to gauge the creditworthiness of a customer in the absence of the CIBIL score routinely used for banked customers in the formal sector.

The biggest differentiator is the field work. While banks make customers run around for a plethora of documents, these finance companies for lower-income housing do the running around themselves. “We don’t have a file, so we go into the field and do the personal verification,” says Dhall.

The teams talk to the applicant and the people he/she works with. For instance, in the case of a vegetable vendor, the finance company’s field staff will find out where the applicant buys stock from, at what rate and to whom it is sold, the margins and the money made and how that compares with other vendors in the same market.

“We do it from ground-up and build our own database. Many professions are unique, and all we need to understand is the customer’s inclination to own a home,” Dhall points out. The field staff record all conversations on handheld devices and these form the basis for sanctioning a loan.

Swarna Pragati Housing lends in rural areas, where the common problem is that of farmers without formal land records. “We get grassroots-level constitutional bodies like the gram panchayats to endorse the mortgage for the loan to the community-acknowledged landowner,” says A Ramesh Kumar, chief managing director.

Interestingly, his firm accesses the records of MFIs and NGOs working in villages to gauge creditworthiness. Swarna Pragati charges interest at about 23 per cent, which is 2-3 per cent lower than what MFIs charge. “Our cost of finance is 15 per cent and we share around four per cent of our revenue with partners (MFIs and NGOs, among others). The cost of doorstep interviews and assessments for each client leaves us with a very small operating margin,” says Kumar.

The high interest rate, however, seems no deterrent for the borrowers. “I don’t think the interest rate is high... I have repaid a loan that my grandfather took 52 years ago. These companies are far more rational than local moneylenders while, on the other hand, banks don’t even entertain us for a loan,” says Aadinath, a farmer in Odisha’s Ichapur village.

A low-margin game

In urban areas, the bigger problem is one of affordability, as house prices are often way beyond the reach of the poor. The key to achieving the goal of affordable housing in cities is a combination of affordable units and availability of finance, says Dhall. “Developers are an integral part of the chain,” he adds.

Private as well as public-sector developers are now building low-cost units as supply lags demand. In Boisar, on the outskirts of Mumbai, the Mahindra group’s real estate arm, Mahindra Lifespaces, is developing affordable houses under the Happinest brand. “We always recognised that there is a latent demand, going by the housing deficit figures. But customers hesitate to buy if the land is out of city limits. So we take up a location that is connected to industrial areas,” explains Sriram Mahadevan, business head, Happinest.

Affordable housing is an MRP-sensitive and low-margin game.

It, clearly, is not for the faint-hearted. That is why both private and public-sector players are working overtime to reduce costs while maintaining quality. “The two biggest cost components are land and construction. We have applied ‘value engineering’ to keep costs in check,” says Mahadevan.

The company has collaborated with IIT-Madras for the foundation technology. A lean, strip foundation has been designed, which does not require piling on the soil, resulting in faster construction at lower costs. Happinest has opted for ‘no wet work’ on buildings by using light-weight blocks that are fixed with adhesives. Gypsum plaster, in place of cement-sand, for the internal walls makes the site water-free besides improving productivity, Mahadevan says.

Deepak Batra, a consultant with Chhattisgarh Housing Board (CGHB), says these techniques, though expensive, do bring down costs in the final analysis. “They drastically reduce the time of project completion, saving on interest rates. A year less for project completion saves far more than value engineering,” he says.

CGHB is building 10,000 units in the heart of Naya Raipur, in a fully developed area. On offer are houses with 30 sqm of constructed area for ₹6.5 lakh. A subsidy of ₹1.5 lakh each from the Central and State governments helps halve the price. Bigger units costing ₹8.5 lakh are entitled to a Central subsidy of ₹2.3 lakh and State subsidy of ₹1 lakh. The subsidies have proved to be a great enabler for the EWS buyer. “Central subsidy reduced my 15-year loan amount from ₹7 lakh to ₹5 lakh, and helped cut the interest from ₹9,300 to ₹6,500,” says Poonary in Mumbai.

For the 10,000 units on offer, CGHB has received over 20,000 applications. “This project has been possible because the State government has given free land for affordable housing in Chhattisgarh. It is prohibitive to make small houses in central locations otherwise,” Batra says.

While work is on at all levels to shelter the un-housed, nothing short of efforts on a war-footing can help the government meet its target of ‘housing for all’ by 2022. Affordable housing finance companies are well aware of that. The onus is on the government to release land at affordable rates.

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