Despite the challenges in rural housing finance, such as erratic cash flow, relatively high non-performing assets and lack of access to land records, Mahindra Rural Housing Finance has been growing at nearly 50 per cent on a year-on-year basis.

Set up in 2007 to cater to the demand for home finance in rural markets, Mahindra Rural Housing, a subsidiary of Mahindra and Mahindra Financial Services, today has a loan book of over ₹5,500 crore. It currently caters to close to six lakh customers from nearly 50,000 villages spread across nine States. The company is looking to grow its business by consolidating its presence in existing areas and diversifying into newer geographies.

In a freewheeling discussion with BusinessLine , Anuj Mehra, MD, Mahindra Rural Housing Finance, spoke about the way forward for the company. Excerpts:

What is the demand for rural housing finance in India? How do you see this segment growing for your company?

A majority of housing finance happening in rural areas is for home completion, rather than home building.

In nine out of 10 cases people in rural areas take loans for incremental construction of their home; there is very little buying or selling that happens.

So, the average ticket size of such loans is about ₹1 lakh and the LTV (loan to value) ratio is much smaller at about 25-30 per cent.

The penetration (of finance) is very low. But the demand is huge and there are not many organised players.

We have been growing at over 50 per cent for the last couple of years and though the base is increasing we expect similar growth in the segment moving forward.

Bulk of our business currently comes from Maharashtra and then Tamil Nadu and Gujarat.

We have also expanded our presence in Madhya Pradesh, Rajasthan, Bihar and Uttar Pradesh.

What are the key challenges in the rural housing market?

The biggest challenge in rural markets is the unavailability of and lack of access to land records. There is apprehension among people in rural areas about approaching the local land records office as they have inadequate information and also consider it quite a hassle.

We have been working with these customers, helping them mutate land records so that we can have a clear mortgage. From the customer’s end it is a huge relief emotionally as they get their land records updated.

Asset quality has been a concern for most financial institutions. Have you seen a rise in NPAs?

It is important to make a distinction between non-performing assets and credit loss.

Classifying an account as an NPA is a statutory requirement. In rural areas, NPAs keep going up and down due to vagaries of nature. Moreover, their income is erratic and cash flow bulky.

For instance, Maharashtra saw NPAs shoot up due to severe drought.

Though people have the intention to pay they are unable to do so and over-dues start piling up. It then might take two-to-three crops before normalcy (in repayment) returns. So, loans tend to get a little sticky.

Our NPAs are in excess of 10 per cent but credit losses are well within 2 per cent and that is the key differentiator.

As long as your model is correct, your product can take care of the customer’s cash flow and if there is adequate follow-up, NPA should not be a cause of concern.

Based on our customer’s cash-flow pattern we have designed six-monthly and quarterly repayment cycles.

You have entered the affordable housing segment. How do you see this business shaping up?

Affordable housing is going to be an important growth engine for our company, moving forward.

Lending to the affordable housing sector currently accounts for around 12 per cent of our loan book. We are very excited about this segment.

The average ticket size for such loans is close to ₹8 lakh, for a property worth around ₹10 lakh.

Unlike the rural market, which is marked by erratic cash flows, this segment comprises people with a steady source of income.

We expect loans for affordable housing to account for nearly half of our total loan book in the next four to five years.

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