As per the State of the World Population report, more than half the world’s population resides in urban areas and the number is steadily on the rise. India is no exception. As per the Global Metro Monitor report, a whopping 67% of global GDP growth will be contributed by the 300 largest global metros. The same report stated that by 2030, India is estimated to have 71 metro cities, of which 7 would be home to more than 10 million people. A consequence of demographic explosion and poverty driven rural-to-urban migration, urbanisation is an eventuality for India.
Despite a majority of the Indian population being dependent on agriculture, population explosion coupled with a widening income gap is a big cause of this rural-to-urban population move. In fact, by The Economic Survey of India 2017 estimates that the size of interstate migration in India was close to 9 million between 2011 and 2016. The Government of India estimated about 26-37 million families in India live in informal housing under poor living conditions, 97% of whom fall under the Economically Weaker Sections (EWS) and Lower Income Groups (LIG).
While historically, customers have been wrought with lack of access, the real estate industry has since seen the rise of affordable housing finance companies or AHFCs. These are firms who have realised that despite low-income customers not possessing reliable documentation, they have steady incomes, therefore, presenting a huge opportunity for the Indian real-estate sector. A recent survey from FSG’s Inclusive Markets team had some surprisingly positive findings on their activities driving this opportunity to fruition.
How AHFCs are identifying the cracks and scaling the problem
Trends showed that the outskirts of large cities in tier I and tier II towns have large volumes of new housing being financed by AHFCs. These are ‘self-constructions’ where families use loans to build a new home with the support of a contractor. The loan size on average is INR 10L, with a 13.5-14.5% interest rate and a tenure of 15 years. The EMI constitutes 30 – 40 % of the monthly household income. These are people who are unable to find a desirable apartment in their favoured location and opt to own land instead. This lets them build an additional floor at a later stage and rent it out for additional revenue.
Despite phenomenal success in scaling affordable housing in this regard, there is however a need to monitor the health of AHFCs. One major challenge for them has been the loss of good customers. Banks and larger HFCs have revealed a pattern of taking over customers who show a good track record of payments and providing them with better rates and ‘top-ups‘. This affects the profitability of AHFCs and in turn, their ability to better their credit ratings. Moreover, the cost of acquiring large customers is the same as small customers, and large customers are more attractive economically for a short tenure. Also, AHFCs lose out on the massive opportunity to include 14 million urban households (17% of urban India) living in slums under poor living conditions. Most of this category would like to have access to financial resources to improve or build their own home. This can hurt access for LIGs in the long run or at least dampen their affordability in the short term.
LIGs don’t need much either. A 3-5 year loan of INR 1-3L is often the critical last-mile affordability for many who intend to live a productive life in a metro area. While the legality of such lending or the interest thereof is lacking due to the lack of security, some AHFCs and other NBFC-MFIs have expressed interest in doing so. Their comfort with this comes from their experience in having rooted ties to the rural community and therefore, their ability to price in the risk.
The path to improved affordability and expanded reach
On a macro and policy level innovative pilot projects in a decentralised way are one way to make sure developments on liveability continue to happen with uniformity. On a ground level, the central government-initiated Pradhan Mantri Awas Yojna scheme can provide an upfront reduction of INR 2.67L for a loan of INR 6L through its credit-linked subsidy (CLS) scheme.
Only tens of thousands of borrowers have received this so far with great success, but without any or little effect on affordability. This is because customers get to know whether they are getting CLS only after receiving a loan, and thus cannot factor this unpredictability into their purchase decision. This currently doesn’t help AHFCs either because they get a flat INR 3,000 and out-of-pocket expenses instead of their standard 1.5% of the loan amount (for CLS loans lesser then Rs 6 lakh). This in turn hurts their outstanding loan portfolio.
CLS has the potential to increase affordability to millions of upper LIGs when it is already helping hundreds of thousands – something it set out to achieve. A pre-approval process for them to know if they are eligible for instance, can enable this. To expand reach, urban authorities can additionally help provide lower LIGs living in slums recommending details of local lenders interested in financing them. A holistic design of interventions from a spectrum of stakeholders is thus, mission critical – from governments, developers, material and digital providers, contractors, NGOs, asset management firms to financial institutions.
This should result in a win-win scenario for the entire value-chain as well as the incumbent government, as it would result in the enablement of rapid growth and realising the Government’s ambitious dream of hitting Housing for All by 2022.