Low Income Housing in India
Financing Low Income Housing:
Magnitude and Economics
Based on a Project for NHB with support from World
Bank, IFC and MSDF
Copyright © 2009 by Monitor Company Group, L.P.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means —electronic, mechanical, photocopying, recording, or otherwise — without the permission of Monitor Company Group, L.P.
This document provides an outline of a presentation and is incomplete without the accompanying oral commentary and discussion.
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October 29, 2009
Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND2
Monitor Group: An Introduction
Michael Porter,Harvard Business SchoolDirector and Co-Founder
of the Monitor Group
Founded by renowned academics, the Monitor Group has grown rapidly to become a leading global management consulting firm
We believe that “Ideas can create impact”We believe that “Ideas can create impact”
Founded by Michael Porter and other HBS faculty in 1983
Renowned for focus on strategy and cutting-edge ideas that help clients grow
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Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND3
Financing Low Income Housing: Market Potential
1. Context: The Business Opportunity and Social Need
2. Economic Potential
Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND4
Context
Low Income Housing: The Landscape
Urban India has a vibrant housing market and housing finance has grown at a CAGR of over 35% for the past 13 years1. However, the supply of housing stock is concentrated on the upper income groups — the low income segments are largely un-served
1 Excluding the recent economic downturn; 2 2005 data- based on the report done for NHB in 2006
Source: NHB Trends in Housing; CRIS Infac Report; Monitor Research
Urban India — Expenditure Pyramid2
16%(10MM)
37%(~23MM)
33%(~21MM)
14%(~9MM)
MHE: <Rs 2,500 pm
MHE: Rs 2,500–
Rs 4,575 pm
MHE:Rs 4,575–
Rs 9,625 pm
MHE: >Rs 9,625 pm
Income
Rs. 11,000US $ 220
Rs. 2,500
Rs. 5,000US $ 100
Less than top 16% of Urban Indian households can afford to own houses
Property rates across various cities suggest that it should be commercially viable to build affordable housing in the suburbs for low income customers in urban India
Less than top 16% of Urban Indian households can afford to own houses
Property rates across various cities suggest that it should be commercially viable to build affordable housing in the suburbs for low income customers in urban India
Typical Low-end housing available in urban marketsTypical Low-end housing available in urban marketsTypical Low-end housing available in urban marketsTypical Low-end housing available in urban markets
Area of city: Within an hour from the city centre
– Close to primary, secondary schools, healthcare centre and market place
– Well connected to city by bus/train linkages Typical complex would comprise 3 to 5 buildings with
4 to 8 flats/ floor and 4 floors
– Regular water and electricity
– No lifts and single set of staircases
– Complex would be fenced by a compound wall with shared open spaces including garden and access to play area for kids
Each flat has a super built up area of 450-550 sq.ft.
– 1 BHK with an attached toilet and bathroom
– Well painted walls and good interiors
– Rs 400-500 per month as maintenance charges
Cost : Rs 450,000 to 600,000
Area of city: Within an hour from the city centre
– Close to primary, secondary schools, healthcare centre and market place
– Well connected to city by bus/train linkages Typical complex would comprise 3 to 5 buildings with
4 to 8 flats/ floor and 4 floors
– Regular water and electricity
– No lifts and single set of staircases
– Complex would be fenced by a compound wall with shared open spaces including garden and access to play area for kids
Each flat has a super built up area of 450-550 sq.ft.
– 1 BHK with an attached toilet and bathroom
– Well painted walls and good interiors
– Rs 400-500 per month as maintenance charges
Cost : Rs 450,000 to 600,000
Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND5
Low Income Housing not Low Quality Housing
Pilot Project- Layout of Building
Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND6
Live in poorly constructed small cramped houses
Poor sanitary conditions – shared toilets, bad drainage, water logging during monsoons
Lack of facilities – properly planned access points, walkways, gardens, dedicated schools etc.
Appalling conditions of Slum-
Dwellers
Appalling conditions of Slum-
Dwellers
Context
Low Income Housing: Social Need and Willingness to Pay
Detailed customer research and our interaction with over 2,000 customers on the ground showed high need for a “house of their own” among people living in appalling living conditions
Has steady job as a factory worker in a textile enterprise in Ahmedabad
Monthly HH income ~ Rs 8000, savings up to Rs 900 - 1000 p.m.
Lives in 1RmK in low income neighborhood, Rent Rs 1800
Profile - NathubhaiProfile - Nathubhai
Source: Primary Research (n=2000), Monitor Analysis
Self-employed Mechanic in Mumbai Monthly HH
income – ~Rs 11,000, savings up to Rs 1000 p.m.
Lives in 150 sq. ft. room in slums, Rent Rs 2400
Married with wife and 2 children Assets – Bank Account (ICICI), Life
Insurance (Rs 1.5L), Refrigerator and Personal Computer
Education– Both children attend English-
medium school Rent
– Has seen significant & frequent increases in rent, has moved house 5 times in 12 years
Profile - GaneshProfile - Ganesh
Both share a dream… “A house of their own”…….
Can afford a 250 to 350 sq ft house, willing to make 20% down payment &
pay 35% of monthly income as EMIs to realize their dream
Both share a dream… “A house of their own”…….
Can afford a 250 to 350 sq ft house, willing to make 20% down payment &
pay 35% of monthly income as EMIs to realize their dream
Family size 5 with mother, wife and 2 children
Assets – Bank Account (ICICI), Life Insurance (Rs 3L), TV set
Education– Both children attend private
Gujarati medium schools Rent
– Increased by 50% in past 3 years and moved every 2 to 3 years
Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND7
Note: 1 Monthly Household Income; 2 Affordability defined as households which have EMI / MHI Ratio of 40% of a Home loan which has a 20% down payment on an Home value, EMI level of Rs 1,200 per Lac (at 12% interest for a 15 year loan); 3 Conservative estimates that 60% of total households in MHI of Rs 5-20K (36Mn) are renting and looking to buy a house of their own.
Source: NHB Trends in Housing; CRIS Infac Report; Monitor Research
Price of unit2 > Rs 25 Lacs Potential demand from ~2 M HHs with
estimated Market Size of ~Rs 500,000 Cr
Various mortgage finance options available for segment
Context
Low Income Housing: The Economic Potential
The low-income housing segment (MHI of Rs 5,000 – 20,000) is estimated at 22 Million households with an estimated opportunity size of Rs. 1,100,000 Cr and is largely underserved
Urban Income Pyramid Offering & Supply of Housing
Price of unit: Rs 10–25 Lacs Potential demand from ~5 M HHs with
estimated Market Size of ~Rs 900,000 Cr
Mortgage finance available broadly
1%(0.7MM)
5%(3.4MM)
22%(15.0MM)
33%(22.4MM)
4%(2.7MM)
10000–20000
>80000
30000–40000
<5000
40000–80000
31%(21.1MM)
5%(3.4MM)
5000–10000
20000–30000
MHI1
(Rs)
Price of House: Rs 3–10 Lakhs Potential demand from ~ 22 Mn3 HHs
with estimated Market Size ~Rs 1,100,000 Cr
Supply of Housing Finance
Various mortgage finance options available for segment
Potential size of mortgage market ~ Rs 400,000 Cr
Mortgage finance available broadly Potential size of mortgage market ~ Rs
675,000 Cr
Severely constrained supply of housing finance for informal sector
Finance available for MHI > Rs 12K in the formal sector, limited availability below MHI of Rs 12K for formal sector and 20K for informal sector
Potential size of mortgage market ~ Rs 8,80,000 Cr
Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND8
Market demonstration of Demand
Ahmedabad: Vatva
Taral Bakeri
Phase 1: 800 units
Price: Rs 3.3 Lakh– 5.6 Lakh
Mumbai :Ambivili
Neptune Group
100 acres
Phase 1: 1800 units; Sector 1: 600 flats sold out in 3 days
1-BHK and 2-BHK
Rs 4.73 Lakh and Rs 8.40 Lakh
Maharashtra: Karjat
TMC – Matheran Realty
15,000 units by June 2011;
3,000 units in Phase 1 –
June ’09
6,000 flats @ Rs 3 Lakh
Maharashtra: Boisar
Tata Housing
67 acres: Phase 1: 1200 units for LIH1-RMK and 1BHK
Rs 3.9 Lakh and Rs 6.7 Lakh
Bangalore: Atibele
Janadhar
11 acres: 1500 units1BHK and 2 BHK; Rs 4 Lakh and 6 Lakh
Bangalore: Value Budget Housing
Development Corporation
Rs 3-9 Lakh townships on minimum 10 acre plots; 1 Million intended flats
Large real estate players like the Tatas and entrepreneurs like Jerry Rao are starting to recognize the business Large real estate players like the Tatas and entrepreneurs like Jerry Rao are starting to recognize the business potential of low income housing and constructing large projects, thereby giving the field increased credibilitypotential of low income housing and constructing large projects, thereby giving the field increased credibility
There is increasing construction of low income private sector housing projects across India
Source: Monitor Research
Ahmedabad: Vatva
Foliage Developers
Phase 1: 400 units
Price: Rs 2.81 lakh upwards
Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND9
Monitor’s activities for the past two years
Facilitating Low Income Housing: “Doing what it takes”
Conveying the opportunityArranging customer financingObtaining customersSharing “best practices” (architectural
designs, site layouts, etc.)
Conveying the opportunityArranging customer financingObtaining customersSharing “best practices” (architectural
designs, site layouts, etc.)
Encouraging DevelopersEncouraging DevelopersEncouraging DevelopersEncouraging Developers
Press including Real Estate trade journals (over 20)
Conferences and group sessions (over 30)
One on one meetings with broad range of stakeholders (over 400)
Press including Real Estate trade journals (over 20)
Conferences and group sessions (over 30)
One on one meetings with broad range of stakeholders (over 400)
DisseminationDisseminationDisseminationDissemination
Existing and new players for mortgage finance (including incubating a housing finance company)
PE and VC funds (incubated a USD 100 Million housing ecosystem fund)
Research on optimal architectural designs, low cost construction technology, sustainability etc.
Existing and new players for mortgage finance (including incubating a housing finance company)
PE and VC funds (incubated a USD 100 Million housing ecosystem fund)
Research on optimal architectural designs, low cost construction technology, sustainability etc.
Building the EcosystemBuilding the EcosystemBuilding the EcosystemBuilding the Ecosystem
Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND10
Financing Low Income Housing: Market Potential
1. Context: The Business Opportunity and Social Need
2. Economic Potential
Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND11
Context
A Stand -Alone Low Income Housing Business: Outline
Urban The need for low income housing and home loan financing is especially acute in urban areas, which are seeing rapid population expansion through migration from rural areas
Reach: The HFC will have an urban focus and will establish presence in Metros and surrounding Tier I/II/III cities
Branch: Hub and Spoke model with 55 branches by Year 10
Target Monthly Household Income range: Rs. 5,000 – 15,000
Both salaried customers who are unable to access home loans and informal sector customers, i.e. self-employed and salaried unorganized individuals
Customer Profile and
Focus
Product Offerings and
Pricing Structure
Primary Product: Loan for home purchase
Loan Amount: 2 – 8 Lakhs: Families earning between Rs. 5,000 and 20,000 can afford homes costing up to 40 times their monthly income, i.e. Rs. 3 – 10 Lakhs
Loan to Value: 50 – 80%: A minimum of 20% equity from the customer will help mitigate the financier’s risk, while ensuring that the loan is not sub-prime
Installment-Income Ratio (IIR): 30 - 40%: This income group typically pays between 20 - 25% of their monthly incomes as rent, so a 30 - 40% EMI is feasible
Loan Tenure: 6 – 15 years: Will vary based on the customer’s income
Pricing Structure
Adjustable Rate Mortgages with typical interest rates between 11 - 15% based on down-payment amount, IIRs, loan Tenure, and perceived risk profile of customer; and allowing approximately a 3-4% spread
Processing fee of 1% of loan value to re-cover loan origination and credit check costs
The business will primarily focus on the urban customer in the Income Group Rs 5-15K who does not have to access to a home loan facility
Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND12
Portfolio Growth Projections over 10 yearsPortfolio Growth Projections over 10 years
Economic Potential
Revenue Potential for a Low Income HFC
It is estimated that at the HFC will achieve significant growth over 10 years – disbursing close to 2,60,000 loans worth ~ Rs. 10,000 Crores
9,3753,7501,500500
37,50018,750
0
50,000
100,000
150,000
200,000
250,000
300,000
Y10
258,398
Y9
172,266
Y8
114,844
Y7
65,625
Y6Y5Y4Y3Y2Y1
Cu
mu
lati
ve G
row
th in
Lo
ans
Cu
mu
lati
ve V
alu
e o
f L
oan
s D
isb
urs
ed
(Rs.
Co
res)
Assumptions1 Assumptions1
Since the HFC market is extremely underpenetrated – it is feasible to assume Year on Year growth rates between 50 – 200% for a start-up, decreasing yearly (MHFC assume 100% growth in the first 5 years; established companies like Dewan & LIC grow at about 25% yoy typically)
Average Ticket Size is Rs. 4 Lakhs
Interest Rate: 14%; Gross Spread of 4%
Loan To Value: No more than 80%
Sanction and Disbursal: 12 month time lag between initial disbursement and commencement of principal repayment
Scheduled loan Tenure is 15 years
The average loan gets repaid in 8 years and there is no prepayment penalty
Since the HFC market is extremely underpenetrated – it is feasible to assume Year on Year growth rates between 50 – 200% for a start-up, decreasing yearly (MHFC assume 100% growth in the first 5 years; established companies like Dewan & LIC grow at about 25% yoy typically)
Average Ticket Size is Rs. 4 Lakhs
Interest Rate: 14%; Gross Spread of 4%
Loan To Value: No more than 80%
Sanction and Disbursal: 12 month time lag between initial disbursement and commencement of principal repayment
Scheduled loan Tenure is 15 years
The average loan gets repaid in 8 years and there is no prepayment penalty
ObservationsObservations The HFC will operate at a loss for the first few
years, but will turn profitable by year 3
It is possible to model more aggressive or conservative growth scenarios based on the capital reserves available, high level strategic objectives (desired share of the market) of the promoters, supply of low income housing stock etc.
Cumulative Portfolio Size is dependent on Average Ticket Size of loan, with bigger loans resulting in a larger book size
The HFC will operate at a loss for the first few years, but will turn profitable by year 3
It is possible to model more aggressive or conservative growth scenarios based on the capital reserves available, high level strategic objectives (desired share of the market) of the promoters, supply of low income housing stock etc.
Cumulative Portfolio Size is dependent on Average Ticket Size of loan, with bigger loans resulting in a larger book size
Cumulative Number of Loans Disbursed
Note: 1 Assumptions are based on interviews with Dewan Housing Finance Company, MAS Rural Housing and Finance, MHFC, and Fullerton Capital
10,336
1,500750
37515060200
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
6,891
4,594
2,625
Y10Y9Y5 Y6Y4Y3Y2 Y7Y1 Y8
Cumulative Amount of Loans Disbursed (in Rs Crores)
Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND13
Per Customer Cost AnalysisPer Customer Cost Analysis
Economic Potential
Customer Level Economics- Revenue and Costs at Branch Level
The average cost to acquire a customer is Rs. 8,000 and the cost to service their loan over their repayment period is Rs. 20,000, while the net income earned per customer is Rs. 88,000
Co
st t
o S
erve
Per
Cu
sto
mer
(R
s.)
Inco
me
Ear
ned
Per
Cu
sto
mer
(R
s.)
Assumptions Assumptions Average Loan Size: Rs. 4 Lakhs Interest Rate Charged: 14% Loan Processing Fee: 1% NPA: 1.0%1
A 0.5% of loan value bonus is provided to the branch sales force as an incentive fee for each loan generated
These assumptions are typical for most HFCs (our data comes from Dewan, GRUH, HDFC and MHFC)
Average Loan Size: Rs. 4 Lakhs Interest Rate Charged: 14% Loan Processing Fee: 1% NPA: 1.0%1
A 0.5% of loan value bonus is provided to the branch sales force as an incentive fee for each loan generated
These assumptions are typical for most HFCs (our data comes from Dewan, GRUH, HDFC and MHFC)
ObservationsObservations
It costs approximately Rs. 32,000 to serve each customer, i.e. cost to serve is about 8% of loan size,
The HFC would earn approximately Rs. 88,000 in net income from each customer
Net Profit Per Customer Over 8 years (not including other costs) is approximately Rs. 56,000
It costs approximately Rs. 32,000 to serve each customer, i.e. cost to serve is about 8% of loan size,
The HFC would earn approximately Rs. 88,000 in net income from each customer
Net Profit Per Customer Over 8 years (not including other costs) is approximately Rs. 56,000
Note: 1 DHFC and Gruh NPAs are less than 1%
3,0002,000
2,000
4,000
20,000 32,000
1,000
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Sales Incentive
Office Overheads
Average NPA
Documentation, Storage & Retrieval
Legal & Technical clearance
Total Cost to Serve
Operating Overheads
88,0004,00084,000
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
Processing FeeNet Interest Income Total
Per Customer Revenue AnalysisPer Customer Revenue Analysis
Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND14
Profitability over a 10 year time periodProfitability over a 10 year time period
Economic Potential
Profitability over a 10 year time frameThe HFC will turn profitable after 3 years of operations, and it is anticipated that margins will grow sequentially in progressive years
Net
Pro
fit/
(Lo
ss)
(Rs.
cro
res)
Per
cen
tag
e R
etu
rn
Note: 1 Based on conversations with HFC Industry Experts and existing HFCs
Assumptions1 Assumptions1
Average Loan Tenure: 8 years Cost of debt: 10% Debt Equity ratio:
Year 5- 4: 1 Year 10- 6: 1
Capex in Years 1 to 3- Rs 3 cr (towards software and hardware)
Net Profit/Loss = Post Tax (Income – Expenses)
ROE = Net Profit/Loss / Average Equity
ROA = Net Profit/Loss / Average Assets
Average Loan Tenure: 8 years Cost of debt: 10% Debt Equity ratio:
Year 5- 4: 1 Year 10- 6: 1
Capex in Years 1 to 3- Rs 3 cr (towards software and hardware)
Net Profit/Loss = Post Tax (Income – Expenses)
ROE = Net Profit/Loss / Average Equity
ROA = Net Profit/Loss / Average Assets
ObservationsObservations
ROE of 23% in year 10 is very robust by the Indian financial industry standards
ROA of 3% in year 10 is comparable to HFC industry standards
ROE of 23% in year 10 is very robust by the Indian financial industry standards
ROA of 3% in year 10 is comparable to HFC industry standards
276.9
52.627.3
16.05.60.8-1.2-2.8
-50
0
50
100
150
200
250
300
Y5Y3 Y4Y2Y1 Y7 Y8Y6 Y10
180.3
Y9
101.9
3.33.22.92.62.52.90.8
23.022.019.0
17.0
13.010.0
6.0
1.0
-13.0-15
-10
-5
0
5
10
15
20
25
Y5 Y6Y3 Y4
2.2
Y2 Y7
-4.0
-13.9
-3.0
Y1 Y10Y9Y8
Return On Equity
Return On Assets
Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND15
Affordable HousingAffordable Housing
Low Income Housing as a Driver for Economic Growth:
Wide Range of Benefits
Low income housing can provide huge benefits to families, communities and aid overall economic development of state
Aiding Overall Economic Development Construction of low income housing provides
disproportionate job creation Creates significant economic value for state
(taxes, ancillary economic activity, source of labor potentially leading to industry, etc
Provide alternative to Urban Slums ~40M people live in urban slums without basic
facilities such as sanitation, water, schools, etc Renters disempowered. All power is w/ slum lords Slum lords “own” houses and benefit from Slum
Rehabilitation Schemes Slums create high pressure on infrastructure
within a city
Benefits for families of Urban Poor Housing is essential for the well-being of a
family Enhanced security and health through
organized housing with access to sanitation Access to better services (schools,
healthcare etc.) which are typically available to higher-income groups
Creation of Low-Risk Asset for Families Long term wealth creation due to value of
asset, “saving on rent” & collateral for loan A “security net” in crisis Low income houses typically built on land with
low cost per sq. ft. Low likelihood of price depreciation, Hence downside risk is low
Benefits to Communities Neighborhoods with good quality housing
have lower crime rates, stronger local economies and a better overall quality of life
Copyright © 2009 Monitor Company Group, L.P. — Confidential — IND18
Largely Un-servedSome PSU schemes, but difficult to access loans due to bureaucracy; staff incentives geared towards disbursement targets
Access to Housing Finance: A Market Overview
Although supply is beginning to flow majority of Banks and Housing Finance Companies are reluctant to serve customers in the informal sector because of the uncertainty of their risk profiles
Difficulty of Assessing Risk
Ticket Size
10 Lakhs
5 Lakhs
Formal‘Semi-formal’Informal
Paid / earns in cash
No formal income documents
No formal residence/identity documents
Salaried with pay slip
Income Tax documents
Residence Documents
Identity documents
Bank account
Salaried or Self Employed
Significant proportion of undisclosed income
Some residence/identity documents
Low-end focused HFCs (e.g., GRUH, MAS)Limited geographic coverage & capacity
Trying to move to higher ticket sizes to
increase profitability
Source: Monitor Research
Select HFCs (e.g., DEWAN HOUSING)Alternate means of income assessment for higher income customers such as supplier and customer checks, or MFI and chit fund savings history; guarantor typically required
2 Lakhs
Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND19
Context
Housing Finance Market: Map of Existing Players
There are 45 registered HFCs in India, and these are split almost evenly between organizations that can accept deposits from the public and those that cannot
• Haware’s Housing Development Finance Corporation
• India Home Loans Limited
• Mahindra Rural Housing Finance
• Micro Housing Finance Corporation
• Swagat Housing Finance Company
• Reliance Home Finance
• India Infoline Housing Finance
• Tata Capital Housing Finance
• Can Fin Homes
• DHFL Vyasa Housing Finance
• Manipal Housing Finance Syndicate
Cent Bank Home Finance
• GIC Housing Finance
• HDFC
• ICICI Home Finance
• Dewan Housing Finance Corporation
• LIC Housing Finance
• AIG Home Finance India
GRUH Finance
• Sundaram BNP Paribas Home Finance
• REPCO Home Finance
• Ind Bank Housing
• National Trust Housing Finance
• Vishwakriya Housing Finance
• HUDCO
• IDBI Home Finance
• PNB Housing Finance
• Deutsche Postbank Housing FinanceMAS Rural Housing
and Mortgage Finance
• HBN Housing Finance
• Indiabulls Housing Finance
• GE Money Housing Finance
• Maharishi Housing Development Finance Corporation
• Swarna Pragati Housing Micro Finance Private Ltd.
• Inara Housing Finance
• Janhavi Home Development and Finance
Kerala Housing Finance
Orange City Housing Finance
• Rose Valley Housing Development Finance Corporation
• Sahara Housingfina Corporation
Satyaprakash Housing Finance India
• SRG Housing Finance
• Akme Buildhome Private Ltd.
Utkal Housing Finance
Vastu Housing Finance Corporation
HFCs that cannot accept Deposits
HFCs that canaccept Deposits
Source: NHB
Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND20
Largely UnservedSome PSU schemes, but difficult to access loans due to bureaucracy; staff incentives geared towards disbursement targets
Context
Barriers to entry for Housing Finance Companies
Housing Finance Companies are reluctant to serve customers in the informal sector because of the uncertainty of their risk profiles
Difficulty of Assessing Risk
Ticket Size
10 Lakhs
5 Lakhs
Formal‘Semi-formal’Informal
Paid / earns in cash
No formal income documents
No formal residence/identity documents
Salaried with pay slip
Income Tax documents
Residence Documents
Identity documents
Bank account
Salaried or Self Employed
Significant proportion of undisclosed income
Some residence/identity documents
Low-end focused HFCs (e.g., DHFC, MAS)Limited geographic coverage & capacity
Trying to move to higher ticket sizes to increase profitability
Source: Monitor Research
Select HFCs (e.g., GRUH, Fullerton)Alternate means of income assessment for higher income customers such as supplier and customer checks, or MFI and chit fund savings history; guarantor typically required
Confidential
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Low Income Segments as Target Market
Largely-Untested Risk Profile, different from Sub-prime in the USA
75-80% LTV – significant individual contribution required; EMIs tend to be 35% of Monthly Income
Target customers have regular employment, albeit with low income – with an unproven credit record which needs to be tested
In the low income segment, relatively low cost of land (esp. in peri-urban areas) leads to high correlation between cost of asset and replacement cost; and hence lower risk of asset bubbles
75-80% LTV – significant individual contribution required; EMIs tend to be 35% of Monthly Income
Target customers have regular employment, albeit with low income – with an unproven credit record which needs to be tested
In the low income segment, relatively low cost of land (esp. in peri-urban areas) leads to high correlation between cost of asset and replacement cost; and hence lower risk of asset bubbles
Low-Income Housing in IndiaLow-Income Housing in India
Outcome: Untested, relatively low-risk segment with significant business potential
Very high LTV; creative structures developed to reduce EMIs
Loans extended without due consideration to ability to pay (basis employment history) – financing provided to those with questionable employment record
Cost of asset disproportionately high compared to replacement cost; this is attributed to the real estate asset bubble in the US – hence high risk of payment default
Very high LTV; creative structures developed to reduce EMIs
Loans extended without due consideration to ability to pay (basis employment history) – financing provided to those with questionable employment record
Cost of asset disproportionately high compared to replacement cost; this is attributed to the real estate asset bubble in the US – hence high risk of payment default
Sub-prime Experience in USASub-prime Experience in USA
Outcome: Sub-prime Defaults and Foreclosures
Confidential
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Key Challenges and Critical Success Factors
Understanding Key Challenges
Unconventional methods are required to measure the credit risk associated with low income informal groups, in the absence of formal documentation
Alternate methods of income verification income such as understanding the customer’s savings history (chit funds, MFIs), business (access to credit from suppliers, line of credit to customers, daily cash flows etc.) are required
Collecting a large number of small payments that originate from the customer as cash is difficult and expensive
Most HFCs use a post-dated cheque or ECS system, but this requires that the customer have a pre-existing bank account
If a cost-effective system to address cash micropayments is implemented, it is anticipated that default rates will drop significantly – default rates among Dewan Housing Finance Limited’s cash paying customers are extremely low (0.13%, as against an average industry NPA of 1.5%)
Cash Cash micropaymentsmicropayments
Cash Cash micropaymentsmicropayments
Understanding the Understanding the risk profile of the risk profile of the
informal informal sectorsector
Understanding the Understanding the risk profile of the risk profile of the
informal informal sectorsector
Understanding real versus perceived credit risk and managing costs to serve are the key challenges for HFCs serving the informal sector
As low cost housing finance is mostly driven by access to supply of appropriate homes, performing adequate due diligence on developer partners is paramount
Managing delays in construction by structuring loans to be delivered post construction in staged phases of the project – this will incentivize the developer and avoid lengthened interest payments from the customers because of project delays
Lack of adequate access to wholesale construction finance from commercial sources
Managing Managing Construction Risk Construction Risk
(Developer Tie-Ups)(Developer Tie-Ups)
Managing Managing Construction Risk Construction Risk
(Developer Tie-Ups)(Developer Tie-Ups)
Source: Monitor Analysis
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Key Challenges and Critical Success Factors
Enabling Regulatory Environment and Government Policy
There are a variety of potential government and interventions that could help catalyze the low income housing finance sector
Source: Monitor Analysis
Access to sources of long term, low cost funding (ideally below market rates) to enable HFCs to keep consumer interest rates low
Expediting NHB timelines for granting HFCs approvals and improved transparency into the process would enable rapid and efficient market entry for new players.
Creating a guarantee fund that could take the first X% of losses against lending to low income groups would encourage new players to enter the market
– This would allow these players to build a better understanding of risk in the segment and in turn appropriately price risk into their mortgage products.
Govt and NHB Govt and NHB interventionsinterventions
Govt and NHB Govt and NHB interventionsinterventions
Allow daily cash collections of EMIs through network of collection agents/MFIs or at the branch
Introduce a seasonal loan products that enables customers to tune their repayment cycle to their seasonal income cycles
Linkages between customers’ savings accounts and repayment schedules to enable direct deposits of EMIs etc
Mobile banking facilities to enable prompt repayments from customers lacking bank accounts
Process and Process and Technology Technology InnovationsInnovations
Process and Process and Technology Technology InnovationsInnovations
Use MFIs extensive knowledge of the target customer base to select customers with strong repayment history and lower perceived risk
Employ MFIs extensive staff of Field Officers for loan collection and disbursals of loans
Encourage the government to make it easier for MFIs to set up HFC divisions
Leveraging the MFI Leveraging the MFI networknetwork
Leveraging the MFI Leveraging the MFI networknetwork
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Establishing a Housing Finance Company in India
Monitor Inclusive Markets’ Role
Introduce the concept of housing finance and disseminate information on the commercially viable business opportunity to provide housing finance to low income customers to broad groups of stakeholders
Actively assist new players interested in entering the HFC space with their market entry strategies and business plans
Disseminate Disseminate Concept & Help New Concept & Help New
Players Adopt the Players Adopt the Business ModelBusiness Model
Disseminate Disseminate Concept & Help New Concept & Help New
Players Adopt the Players Adopt the Business ModelBusiness Model
Monitor is well positioned to help incubate new Housing Finance Companies focusing on the low income sector, through its knowledge of the low income space in India as well as its deep networks
Assist in preparation of Information Memorandums for HFCs looking to raise funds
Connect HFCs to Private Equity investors looking to invest in the low income housing finance ecosystem
Actively assist in the fundraising process through broader introductions and brokerage with sources of capital such as multilateral institutions, foundations, impact investing networks etc.
Facilitate Access to Facilitate Access to CapitalCapital
Facilitate Access to Facilitate Access to CapitalCapital
Assist entrepreneurs through our knowledge of the process of setting up an HFC and introductions to experts and prior successful applicants
Connect the HFC to lawyers and technical experts with deep expertise in housing finance
Introduce the HFC to Monitor’s vast networks of developer partners, and facilitate tie-ups between the HFC and specific low income housing projects
Link HFC to key Link HFC to key players in the Low players in the Low Income Housing Income Housing
Ecosystem through Ecosystem through Monitor’s networksMonitor’s networks
Link HFC to key Link HFC to key players in the Low players in the Low Income Housing Income Housing
Ecosystem through Ecosystem through Monitor’s networksMonitor’s networks