Anuj Mehra, MD, Mahindra Rural Housing Finance
For most Indians, owning a house goes far beyond the utility and shelter that it provides; it is a matter of pride. Home ownership is a key milestone in life. A home is not just a roof over one’s head, it is almost like a weight being taken off one’s shoulders.
Yet, as a nation, we are faced with a housing crisis. KPMG has estimated that by 2022 we will need as many as 100m new houses of which more than half (55m) will be in rural areas. More than 95% of the housing requirements in urban areas would be from what are called the EWS (Economically Weaker Sections) and LIG (Low Income Group) segments – essentially the financially underserved or unserved consumers.
An obvious reason for the housing shortage is the lack of housing finance to make home ownership possible. A home loan is much more than just money - it provides a customer the ability to create a safe, healthy and nurturing environment for the family and is the storehouse of some of the most priceless moments in one’s life. This is a key reason why intentional defaults in particular and defaults overall, for home loan repayments are low. Home Finance is one of the safest asset classes with a low default rate historically (housing loans had a default rate of just 1.4% in FY15-16)
And herein lies the irony! India has a massive housing shortage, caused partially by a lack of suitable housing finance, which is actually one of the safest lending options for lenders!
The stress has to be on “suitable” – because we need suitable business models to deliver suitable funding options to this hitherto largely underserved (in fact unserved) consumers. Housing finance companies are slowly starting to look beyond the typical income assessments based on salary slips and Income Tax Returns, which are invariably not available with this customer segment. We are now developing appropriate mechanisms to cater to what is called the “Affordable Housing Segment”.
While there are various definitions of what constitutes the “affordable” segment, from my perspective this segment has two characteristics: a household income of less than Rs. 5 Lakhs and a lack of documentary evidence to prove their credit worthiness. Another complication is that this segment has erratic incomes and bulky cash flows. These are some of the basic challenges Housing Finance Companies have to overcome to cater to the Affordable Housing Segment.
In the past, the affordable housing segment was plagued with a lack of understanding and fear of the unknown which made institutions wary of taking the first step. As the familiarity with this segment developed, institutions slowly began to step out of their comfort zone and started looking at the challenges as opportunities rather than hindrances. Gone are the days when financiers focused only on those with documented sources of income. Methods like field investigation of assessed income through proxies have proved to be an invaluable tool to assess informal sources of income. While every project in the affordable housing segment might have its own unique set of technical and legal issues, it also provides a unique opportunity of creating a lifelong customer who is grateful for being helped at a time when he was neglected by other institutions. The institution needs to be present with the customer at every step of the way, often helping him fill up paperwork or procuring the necessary documentation.
There currently is wave of change moving through the housing finance industry with different financiers pioneering innovative financial products and processes which are suited to their risk-taking appetite. The industry is also leveraging technology and intellectual capabilities for income assessment. Companies are shifting from their archaic mindset and have begun to realize that they aren’t simply in the business of growing profits but also impacting lives and there doesn’t need to a trade-off between profitability and driving social development. Housing financiers have now begun to go beyond simply just providing a loan. From providing advisory services to financial literacy campaigns, the segment is slowly beginning to awaken to the benefits of a shared value business model.
As this industry changes so do the lives of millions of Indians across the country. The affordable housing segment provides financiers not just with the power but also the privilege of helping build the future of our nation. As we all play our respective roles in this ecosystem all signs point towards a bright future for housing finance in India. It heralds a time of new business models, new mindsets and a new India. An India in which ‘Housing for all’ isn’t simply a concept but a reality.