Micro-mortgages /Housing Microfinance MUNICIPALIKA 2018

Smart & Sustainable City Solutions

GSV Ramu Consultant – Housing Finance, India

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Innovation and Microfinance

• Change + Risk Innovation!

• Microfinance is a great example of “Innovation”

• Housing Microfinance is the next natural milestone in this ‘innovation journey’

– “Accepting Change” and “Taking Risks” continue to be the watchwords in this journey

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Accepting Change

Mainstream Housing

• Essentially urban

• Formal sector

• Banked

• Formal title deeds

• Risk perception - Low

Housing Microfinance

• Rural / Semi Urban

• Informal Sector

• Un-Banked

• Gaps in title deeds

• Risk perception - High

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• Above all, requires a major change in mindset

• The way we view this customer and approach this segment

Taking Risks

What appears risky to a mainstream lender:

• Repayment Capability in the absence of documented income

• Lack of proper title documents

• Cash Transactions and high operations cost

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Ability to Innovate – The field experience

Repayment Capability

• Assessing the repayment capability

– Ability and Intent

• Ability: Verified by ‘Credit Assessment’

• Intent: Verified by their track record with MFIs

– Credit Assessment: based on a Hybrid Credit Model

• Credit Scoring model combined with “subjective assessment” of the borrower and his household

• Subjective assessment is based on a questionnaire + artifacts+ affirmations + expert human judgment

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Key Observations from field experience

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• Cash transactions

• INIR (Installment to NET Income Ratio) hovering around 60%

• NET Income = Gross income LESS total household expenses LESS other loan commitments

• In all cases, LTV is less than 50%

• Higher “own contribution” towards construction

• ‘Debt-averse’ behavior • Customer preference for shorter tenors

• Repayment ahead of schedule (25th to 30th ; 98% repayments by

24th itself !!)

Customer Profile – Varalakshmi (Kandi Village, Sangareddy, (off Hyderabad) AP, India)

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MFI relationship : 8 years Business : Highway Eatery Monthly family Income : Rs 17,000 Loan Amount : Rs 120,000 EMI : Rs 4200 Tenor : 3 yrs Land Area : 54 Sq. yards Built-up area : 407 Sq. ft

MFI relationship : 4 years Business : Roadside Eatery Monthly Income Of family : Rs 18000 Loan Amount :Rs 1,40,000 EMI :Rs 4620 Tenure : 3 yrs Land Area : 80 Sq. yards Built-up Area : 372 Sq. ft

Customer Profile - SHAHEDA BEGUM (Chinna Sankarampet Village, Medak Dist., AP, India)

MFI relationship : 5 years Business : Milk business and Auto Rickshaw Monthly Income Of family : Rs 19,800 Loan Amount : Rs.1,20,000 EMI : Rs 3,795 Tenor : 4 yrs Land Area : 50 Sq. yards Built-up Area : 368 Sq. ft

Customer Profile - K. BALAMANI (Raipally Village, Zaheerabad District, AP, India)

POSITIVES

• Nobody wants to ‘walk away’ from home!

• Empirical data shows positive customer credit behavior (debt aversion, seeking shorter tenors …)

• NHB, the Regulator is very receptive and encouraging – Willing to securitize and provide low cost funds

CHALLENGES

• Manpower training on credit assessment – Verifying and validating “secondary qualitative / alternative data”

holds the key

– Subjective element is inherent to this process

• ‘Working around’ the property ownership / title deeds issue

• Sourcing low cost funds for onward lending 10

Positives and Challenges

• 1. Is this a scalable business & is it profitable?

• 2. How big is the opportunity?

• 3. Most important, is it subprime?

- Loan to a borrower who does not qualify for regular loan due to poor credit record, low income and lack of job security

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Some top of the mind questions !

How big is the opportunity

• 21 mn affordable homes required

• US$ 245 billion housing market

• 66% of labor force in informal segment and that too in Rs10,000 – 30,000 income bracket

• Demand in Urban, semi-urban and rural

• Two business models available – linkage with affordable home builders; fund for repairs, renovation, construction of individual houses

Issues to be addressed on supply side

• Distance from city center – Missed opportunity in Hyderabad

• Too small units

• Government into construction activity

• Government selecting beneficiaries

• Banks rejecting the loans

Right approach

• Linking Metro / Bus stations to housing activity

• Government must only provide approvals and infrastructure and stay away from construction

• Top builders to be involved with outer guidelines to operate

• Selection of beneficiaries by bankers from applications received

Focus areas for PMAY success

• States to simplify the process of updating property records. This will allow all citizens to obtain legal documents to their land and property in order to fully embrace the subsidy features of PMAY and access credit, which will enable them to upgrade their housing.

• Enable individual households who don’t have legal titles to in-situ upgrade their housing by providing them with security of tenure — even a “no eviction guarantee”.

Thank You!

For copies of this presentation or any questions

email: gsvramu@gmail.com