Affordable Housing -This is where the action should be!
Last year I was invited to speak on one such forum where developers, financers, state authorities and media companies like Apnapaisa voiced concern about not much action happening on this front. Admittedly this is an important area of concern as it can be a strong contributor to the India’s growth story. I believe year 2011 will witness some great action on this front if the entire industry works towards it. The new home aspirants will be immensely benefited as one of their basic needs of makaan will be taken care of with arrival of affordable housing.
Giving you the backdrop, the home loan industry has been growing at a brisk pace of 25% + on the back of increase in demand and loan ticket sizes following an increase in residential real estate prices across the country. What is lost in this growth story is the fact that people who have income less than 15,000/- every month find it difficult to get a loan. Also not too many developers are active in building the houses that they can afford (costing in single digit lakhs).
The situation is changing slowly as a few pioneering developers recognise the potential of this market such as former Citibanker Jerry Rao’s Value and Budget Housing Corporation (VBHC) project just outside the Electronics City in Bangalore. There are many more such projects such as Atulya project at Anakaputhur, Chennai (Annai Builders) or projects at Vatva near Ahmedabad or Amibivali near Mumbai. In most major cities affordable housing is available in the extended suburbs of the city with good connectivity with business and manufacturing hubs in the main city. These flats typically cost a minimum of around Rs. 5- 7 lakhs. In the meanwhile, Government’s announcement to build five lakh affordable housing units in Mumbai is also a ray of light that will bring in respite to the prospective buyers. These houses will be made available on rent for people from middle and lower-income groups. The project is likely to come up in the next five years. This move may help bring down the cost of housing in Mumbai.
The home finance industry is also evolving to cater to this market, which holds special challenges. The biggest challenge is the lack of proper income documentation to verify the income earning ability of the potential home loan consumer. Think how difficult it will be to estimate the income of a roadside food vendor who does brisk business and earns around Rs. 500 per day or an autorikshaw driver who may earn around Rs. 250- Rs. 300 per day. Also this consumer tends to have nil or low banking habits meaning that even if they have bank accounts these are not actively used as they do most of their transactions in cash. Traditional lenders are trained in evaluating paper and not people. It takes a lot of time, effort and money to estimate the income of such borrowers. Also such borrowers are more vulnerable to external shocks (think municipal action to clear roadside eateries) or other risks that they share with the normal home loan borrowers such as loss of job, sickness or death in the family, etc. In fact the risk of the developer delaying delivery of a booked flat is the highest in this category since they anyway have to stretch themselves to pay the pre-EMI interest on construction linked payments made to the developer. This is a double burden on their incomes as they continue to pay rent during the time when the house is being constructed. Some of these borrowers may also find it difficult to adhere to a strict monthly cycle of repayments since they tend to have daily incomes. All these reasons require specialist-lending institutions that understand these markets and cater to their requirements.
Some of the established companies such as Dewan Housing and GRUH cater to the upper end of this market where borrowers will at least have some income and identity documents unlike the lower end of the market. Now specialist-lending institutions are springing up to cater to this market. Among them are Micro Home Finance Company and MAS Finance etc. They normally have specialised procedures to estimate the income of the borrower. They also normally provide finance only to specific developer to reduce the construction risk to a minimum. They are also beginning to tie up specific insurance packages to protect the consumer (and themselves) against insurable risks such as death, sickness and property damage.
Since the ticket sizes are smaller the operations and collection costs tend to be high and hence these loans are priced around 12-14%. Also there is not enough experience in the market on the repayment behaviour of such consumers. In fact after a reasonable size portfolio is observed for a reasonable period of time, credit rating parameters will be honed for this market which in turn will increase the availability of re-finance for the lenders. The windows for re-finance of the lenders is also currently limited to NHB that too after a certain number of years have elapsed from their starting their operations. As the industry gathers more experience and also more refinance windows open, the interest rates are likely to become lower.
In fact the home finance industry is clearly evolving to cater to this class of consumer as it recognises the business opportunity inherent in this market.
(The writer, Harsh Roongta is the CEO of Apnapaisa.com)