Riding the Digital Wave to Deliver Housing for All
Driven by population growth and rapid urbanization, housing shortages are causing increased homelessness in urban India. According to the Technical Group set up by the Government of India, 88% of urban housing shortages are from Economically Weaker Sections (EWS) and around 11% from Lower-Income Groups (LIG). The problems cited include limited access to finance, lack of land availability and higher construction costs. The Government of India has a strong focus on bridging the gaps in this sector, including the Pradhan Mantri Awaas Yojana (PMAY), which was launched in June 2015 and aims to provide affordable housing to the urban poor. This scheme seeks to build 20 million houses for the urban poor by 2022 by providing financial assistance of INR 2 trillion (US$31 billion). Affordable housing was accorded infrastructure status in the FY18 Indian budget to facilitate easier access to capital funding for companies involved in this sector and to improve liquidity. The Government is also offering additional subsidies on loans for low cost housing, pushing the demand even more.
A recent report by credit information bureau TransUnion Cibil, shows that loans meant for affordable housing (loan less than INR 1 million) have grown at 23% CAGR over the last five years. The report pointed out that close to 3.5 million new low-cost housing loan accounts have been opened in the last five years, with 750,000 borrowers added in 2016 alone. According to a report released by the rating agency ICRA, overall housing credit in India was set to grow at 16 -18% in FY17. The report further mentions that while growth in the prime home loan segment might moderate; the affordable housing segment is likely to grow at a faster pace with efforts being made to address the supply, demand and affordability issues. The market for affordable homes is expected to reach INR 6.25 trillion by 2022, driven primarily by wider disparity in household incomes, end-user preferences and high home prices.
There has been a significant rise in the number of Housing Finance Companies (HFC) dedicated to affordable housing. Even large lenders have now started focusing on this segment. Rapid urbanization and growing aspiration levels are fuelling growth in this segment. Most companies are finding this sector much more promising than the traditional large-ticket housing. Low delinquency rates on affordable housing loans over the past five years and relatively low NPA levels for HFCs over the medium term further increase the sector’s attractiveness.
The end customer targeted by these HFCs is not a typical loan customer. Many do not have fixed sources of income, are typically employed in the unorganised sector and do not have access to formal credit from banks. Poor access to credit has traditionally been driven by their inability to show a steady income due to lack of formal salary slips. Loan sizes are typically below INR 1-1.5 million. Companies operating in this sector face a range of challenges. The absence of paper based sources of income has forced lenders to devise innovative ways of assessing credit worthiness – based on a combination of interviewing the person, assessing employment profile, family and social history and many other factors. Extreme cost sensitivity is another important aspect and hence HFCs must keep their operational costs to a minimum. One of the consequences of this is that lenders reach out to customers where they are – without a rigid branch structure, eliminating lengthy paper based processing models, streamlining and automating processes, while using a more comprehensive approach to credit profiling.
Despite the rapid spread of technology, many of the customers that these HFCs target are not very tech-savvy, internet ready or familiar with digital tools considered common today. To derive the benefits from advanced digital capabilities – for example, processing credit decisions in a fast, transparent and cost effective manner – HFCs must tailor their approach to the market. Some HFCs have embraced digital technology to serve their customers better. For example, technology has been the cornerstone of delivery strategy at Shubham Housing Finance. They have not only designed and automated their processes to suit the needs of their target customer but they have also put in place a comprehensive credit evaluation mechanism. Shubham has leveraged the benefits of a cloud deployment model to implement an agile, scalable and cost-optimized structure which has resulted in the business reaching the breakeven point in their first 12 months of operations. The company has used digital focus to extend its reach beyond the physical branch setup and embed speed in its loan processing.
FinTech companies have shown how a unique combination of business innovation and advanced technology can be used to create a winning proposition for both the lender and the end customer. Perhaps HFCs can incorporate some of the relevant tactics adopted by these FinTech companies. Affordable housing offers tremendous opportunity to fast-track the fulfillment of a key need of a large segment of the population in India. Keeping in view the constraints in this area, it is vitally important for the HFCs to continue to innovate and develop unique business models. Best practice led approaches backed by the smart use of advanced technology can help HFCs reap the benefits of ambitious initiatives such as ‘housing for all by 2022’.