Opportunities and challenges for the affordable housing sector
Mumbai: A panel of experts at the 11th Mint Annual Banking Conclave discussed the opportunities and challenges in affordable housing. The panellists were Sandeep Menon, managing director (MD) of Vastu Housing Finance Corp., A. Ramesh Kumar, founder and chairman of Swarna Pragati Housing Microfinance Pvt. Ltd, Srinivas Acharya, MD of Sundaram BNP Paribas Home Finance Ltd, Harsh Vardhan, partner and director of Bain & Co. and Vipul Roongta, MD and chief executive officer of HDFC Capital Advisors Ltd. The panel was moderated by Tamal Bandyopadhyay of Mint. The discussion has been edited for brevity and clarity. Excerpts:
On one hand, you have a supportive government and on the other side there is fierce competition with as many as 92 housing finance companies (HFCs). How do you see it panning out?
Menon: The market is huge and the opportunity is fantastic. We are going not into the top 6 cities and not to the top tier people. We go to the next 10, 40, 200 cities, and the semi-urban and rural areas of this country. HFCs go to 90 or 100 or 125, I think at the end of the day (what matters is) a combination of execution capability, risk management, and underwriting ability backed by strong capital and consistency in the market place in terms of executing for the customer on an ongoing basis. It is going to be survival of the fittest. Because liabilities in this business are a key challenge and as long as you are able to manage them along with managing risk on a consistent basis, there is a significant opportunity. I don’t see any bubble happening in this business. Majority of customers are borrowing for their first home and there is very limited downside risk in lending to them.
I find all these HFCs are backed by private equity (PE) investors who look for 20-22% kind of returns. How long will this honeymoon continue?
Vardhan: So the honeymoon will continue until the first deal goes bad and thereafter it will spread around. PE has solved the equity problem for housing. They have not solved the liquidity problem. Because of the aggressive licensing, we have gone from 50 HFCs to a 100, but as a result, there is a mushrooming of a large number of sub-scale HFCs, which actually struggle to get financing. But despite the number going, the top 4 HFCs have 85% of the market.
You start with a BBB rating, banks are reluctant to give you (credit), you can’t access markets, debt funds and so on. Unless some of these institutional features are developed, where there is a large pool of liquidity available to HFCs, you will not have these guys scale up.
How easy or difficult is it to get into affordable housing in rural India?
Kumar: The first challenge starts from the psychology of the rural householder who does not want a 15-20 year loan. He wants a short loan but at the same time wants a small EMI, which is within his capacity to repay. Many of them have been living since generations on a piece of land but they are not being able to call it their own in terms of documentation, titling. Many of them don’t have individual credit histories, which conventional lenders require. On top of that, you add other dimensions like what would be the impact of an agrarian distress in a year, how many years would the lingering affects of that persist. If a double whammy like demonetization comes on top of an agrarian distress, you can imagine the kind of stress that the householder undergoes and the strain on the repayment capacity. This is where we have come up with a unique approach of incremental housing finance, saying we will give short-tenor, multi-cycle loans with small EMIs rather than long-duration, high-value, high-EMI loans. Other innovation that we have brought in is relating to the title deeds.
But the transaction costs are a challenge and there are some things that can be beaten only by a longer journey, larger volumes which will be able to squeeze the transaction costs and create adequate margins.
Vipul, you are the only PE fund manager sitting among us. Tell us your experience?
Roongta: I think all the HFCs are looking at the demand side, where they are essentially looking at funding the consumer. The fund, we are looking at, and in general in HDFC, our effort has been that it is never about only funding the demand side. A good housing finance organization needs to also have an equally good say on the supply side. When I say supply side, it means solving the financing requirement of the financer, of the supplier, that is the developer. This in my opinion, probably 50% of the battle is won if we just look at the consumer side of things because on macro terms it is a great play given the consumer demographics, requirement gap.
Srinivas, what is your experience of the challenges?
Srinivas: Affordable housing segment is one, which is growing and the best is yet to come and let me also tell you that almost all HFCs across the whole spectrum, we are doing lot of affordable housing financing. I think this is the only industry where the regulator gives long-term funding. In our case, we get almost one third of our funding from National Housing Bank (NHB).
The challenge I would like to state here is more on the recovery side because the legal implementation of the laws that support our recovery process, we have different in states. Law is not followed in letter and spirit.
The MD of NHB also mentioned that they are talking to the state governments on stamp duty that is one of the biggest challenges. I am talking about two aspects, one is the different stamp duties in states, and the other is the differential treatment for affordable housing project.
Most of the legal things come under the state governments. I think the central government has made all the changes that needed to be done, made its intent very clear, they have also done what was needed, on the implementation side, it is the state government and there are examples how different states have made the best of it but there are also states which have not been able to make good use of it.
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