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US-based Bessemer buys stake in affordable housing finance start-up

US-based Bessemer buys stake in affordable housing finance start-up
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First Published: Thu, Jun 09 2011. 12 04 AM IST
Updated: Thu, Jun 09 2011. 12 04 AM IST
Bangalore/ Mumbai: Bessemer Venture Partners (BVP), a century-old venture capital fund, has bought a stake in a housing finance start-up founded by Jaithirth Rao and P.S. Jayakumar for an undisclosed sum.
Home First Finance Co. India Pvt. Ltd offers small loans to low-income borrowers for buying homes priced at Rs5-15 lakh. Details of US-based BVP’s investment in Home First were not available.
“We are bullish on India’s growth of housing finance for affordable housing,” said BVP’s senior associate Abhijeet Muzumdar. BVP, which has invested in 28 companies in India since it entered the nation in 2004, has about $1 billion (Rs4,500 crore) of capital committed to the country.
A host of companies have ventured into low-cost home finance in the recent past, offering loans of Rs2-6 lakh to borrowers earning about Rs10,000 a month—a population largely neglected by regular banks.
Mortgage lenders such as State Bank of India and Housing Development Finance Corp. Ltd are the main source of funds for homebuyers in India. Low-income borrowers find it difficult to access loans from these lenders because of tight regulatory norms.
Rao and Jayakumar aren’t new to the category. The former employees of Citigroup Inc. last year started the maiden project of their property development firm Value and Budget Housing Corp. Pvt. Ltd (VBHC) to build 1,900 homes outside Bangalore, each priced at as much as Rs10 lakh.
“There is a significant gap in the demand-supply graph in affordable housing and the biggest challenge is the need for a public policy,” said Ajit Krishnan, sector leader (infrastructure and real estate) at audit and consulting firm Ernst and Young. “Cost of land regardless of location and cost of construction are very high to enable affordable housing.”
The availability of loans to low-income borrowers is expected to promote affordable housing in the country, analysts said.
Financial companies, including Mahindra and Mahindra Financial Services Ltd (MMFSL), Muthoot Fincorp Ltd and Dewan Housing Finance Corp. Ltd, have either set up units dedicated to small home loans or are scaling up their business to cater to these clients. These firms have relaxed norms on income documentation to provide easier loan access to low-income borrowers.
But challenges exist.
There are two major issues before buyers seeking affordable homes, said Muzumdar. The first is the scarce availability of low-priced homes; and the second is the limited housing finance available for this category.
Another challenge is in “keeping interest rates affordable for customers and operational costs low”, said Manoj Viswanathan, chief executive of Home First.
Typically, interest rates offered to low-income home loan borrowers hover at 10.5-16%, slightly higher than the 10-12% that commercial banks charge for regular home loans because of the higher risk involved. Home First charges 11.95-14.25%.
Many of the housing finance firms focusing on affordable homes have chalked out ambitious growth plans. MMFSL, which has set up a rural housing finance unit called Mahindra Rural Housing Finance Ltd, is targeting a loan book of Rs5,000 crore in three years, from around Rs300 crore now.
Kerala-based gold loan financier Muthoot Fincorp has set up a unit called Muthoot Housing Finance Ltd to cater to small home loan borrowers. The company expects to start business in a month with an average loan ticket size of Rs5 lakh, and is aiming for a loan book of Rs120 crore by the end of 2012.
“The demand for low-cost housing is large and is estimated (at) around 21 million units across India. That itself is a huge attraction for new players,” said Maneesh Srivastava, chief executive of Muthoot Housing Finance.
Home First Finance has so far sanctioned loans worth Rs14 crore to buyers of homes in three affordable housing projects—Vaibhava, which is VBHC’s maiden project, and two projects near Mumbai. Anil Sarin, managing director of BVP India, has joined the board of Home First.
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First Published: Thu, Jun 09 2011. 12 04 AM IST