Housing Finance, India Case Study

By Housing Development Finance Corporation Limited
India continues to be amongst the fastest growing major economies in the world

• India is a domestic, consumption driven economy — Favourable demographics – India’s population is 1,3 billion, of which 66 percent is under 35 years of age — Urbanisation – Currently 377 million people or 32 percent of total population lives in cities, estimated to be 600 million or 40 percent by 2030.
• Housing has strong direct and indirect linkages with several sectors — Supports core sectors like steel and cement and other industries — Employment generator.

Key Characteristics of the Housing Finance Market in India

• Mortgage players include dedicated housing finance companies, banks and non-bank financial companies
• Number of new niche housing finance players – typically small players who focus on affordable housing in specific geographies.
• Many are backed by private equity players or impact investing funds.
• Customer profile: salaried and self-employed from the formal and informal sector
• Home loan characteristics – Interest rate: Floating / Fixed – Average Tenure at inception: 20 years – Loan to Value Ratio (LTV): Regulatory cap at 80% (but customers prefer higher own contribution to reduce the debt burden)
• Housing loans form the largest component of retail loans
• Asset quality in home loans has remained strong.
• While the key demand is for housing loans, the market for loans against property is also growing

Supporting Institutional Frameworks in India

• Credit Bureaus – India’s first credit bureau was established in 2000. India now has 4 credit bureaus – Helps lenders access accurate credit information on the customer
• Foreclosure Norms – Foreclosure norms in place since 2002 – Helps enforce security held as collateral in case of default without going to the court; useful tool for wilful defaulters
  Central Mortgage Registry – Central mortgage registry established in 2011 – Prevents frauds involving mortgage security
• Real Estate Regulatory & Development Act, 2016 – Creation of real estate regulators
  Objective is to ensure compliance on the part of developers and provide consumer protection
• The good thing about Housing Microfinance
• For the low income segment, ‘access’ to credit is more important than the cost of finance
  Housing microfinance can reduce the role of the ‘money lender’ who charges usurious rates of interest

Spreads are higher

• General trend shows good repayment history
• Use of intermediaries such as non-governmental organisations and community-based organisations
• Need for mortgage insurance products to encourage formal lenders to participate in housing microfinance
• Lending institutions need to have close relationships with developers building low income housing to ensure the homes are given to the intended targeted beneficiaries
• Sourcing, Underwriting and Disbursement Process in India
• Sourcing of application by dedicated Sales Team
• Collect Application form, KYC and available credit documents, Income & Vernacular
  declaration and property documents
• Personal discussion (PD) to be carried out by Credit staff or Credit Assistant at
  respective branch as per the complexity of the case
• If in doubt, case to be discussed with central approval team
• Else, case to be recommended and Double-checked at the Branch
• Approval of the loans to be done centrally by the central approval team
• Project approval, Legal & Technical, Disbursement, Accounting, Recovery and other
  support functions provided by the Branches

Sourcing strategy

• Vertical will lend in areas / peripheries as decided by the respective Branches and in projects approved by the Branch Project Approval Committee
• Technical deviations, if any, will be approved by Technical Head
• The Business Development (BD) resource of the Vertical will work in close co-ordination with the Branch BD
• Update all leads sourced from BD activities on the Lead Management System (LMS), allocate the same to the sales executives and monitor the conversion
• BD activities for Developers – Identify projects with unit cost upto Rs.2.5 mil. with stock of unsold units – Tap projects with low penetration of normal loans – Conduct Meetings with developers – Collect Master File of affordable projects with unsold stock.

Sourcing strategy

• BD activities for Housing Board & Development authorities – Develop contacts with senior officials in their marketing department Collect data on their projects and the inventory available – Get list of Allotees with their contact details – Screen the customers on phone and decide go/no-go and contact the eligible customers for application
• Tapping the Demand side: – Tie up with Small Finance Banks and MFIs for sourcing affordable Housing loans from their customer base – Awareness Programs through market-industry associations/ trade bodies. Campaigns/ Programs/ Activities in employment/ residential clusters.
• Underwriting/ Income Assessment process /Visit to Residence and Place of Occupation /Estimation of Income based on informal records / banking / credit history /Verification of sources of own contribution / net worth

Use of Data and Technology

• Use MFI data available with Credit Bureaus
• Look alike scores for New to Credit customers
• On line Identity and business confirmation services
• Building a decision engine based on templates
• Mobile and tablet based log in and appraisal process
• Electronic payment

Government Initiatives
For developers:

• Tax Holiday for construction of affordable housing projects
• Affordable criteria based on carpet area of house
• Affordable housing defined as Infrastructure and hence eligible for long term funding

For Customers:

• Interest subsidy provided by government
• Credit Guarantee scheme
• Women ownership – funding and stamp duty concessions
• Additional tax benefits for first time buyers
• Use Provident Fund savings to subsidise EMI
• Government Initiatives

FOR LENDERS:

• Refinance from Central Bank
• Interest subsidy to borrower increases eligibility
• Credit Guarantee helps to transfer risk
• Incentives to developers reduces supply side risks
• Easier access to international funding for such projects

Affordable Housing Finance – Challenges

• Lack of availability and high cost of land are the key hindrances to affordable housing
  Cost of collecting information on borrower’s credit worthiness is high and time consuming affecting scalability
• Income assessment may be inaccurate because of limited verification options
• Frauds/ integrity issues resulting in higher losses
• Higher yields are temporary in nature – repricing may become necessary to retain the loan book
• Unavailability of trained/ skilled resources and high turnover of employees
• Credit Appraisal Challenges – Loans generally given to those working in the informal sector – May not have ‘documented’ proof of income and hence may be difficult to accurately assess the credit risk of the customer – Small ticket loans, large volumes
• Legal Challenges – Most low income households have ‘para legal’ rights to their properties, but falls short of full legal title.

Affordable Housing Finance– Opportunities
Opportunities • Demand for affordable housing by 2022 is estimated at 25 million units. – Huge opportunity in Tier 3 & 4 cities with end user demand

• Affordable housing finance market is estimated to be a ~USD 95 billion opportunity by 2022.
• Combination of factors are converting latent demand into a commercially lucrative business opportunity: – Government financial support and policy thrust, – Regulatory support, – Rising urbanization, – Increasing nuclearisation of families, and – Increased affordability.