Bangalore: Concerns of defaults are holding back microfinance institutions, or MFIs, from a full-fledged expansion into home loans even as they seek to turn their clientele of poor borrowers into consumers and compete with commercial banks.
MFIs, established mainly to lend small sums to the unbanked poor to help them earn a living, say there’s potentially a huge demand for home loans among their customers. At least two of seven prominent MFIs that Mint spoke to have started experimental lending for home purchases to test the waters while the rest are hesitant.
“This is unsecured lending. Risks are too many,” said a senior official at SKS Microfinance Ltd, India’s largest MFI, who didn’t want to be named. “It’s a different and a difficult ball game. We do not know yet how to price it.”
Risky venture: A file photo of area managers conducting a weekly meeting at a village near Mysore. MFIs fear defaults may be higher in the case of home loans because the borrowers would be individuals and not groups. Hemant Mishra / Mint
If defaults pile up, it could be the equivalent of the US banks’ subprime crisis for micro lenders, he said.
The official added: “We need to be very careful as defaults would be high. We do have a demand. Still, we need to work out how to go about it. We are still working out the legalities ...and have involved sector experts.”
SKS will launch a pilot programme of home lending, but not in the next two-three months.
Home loans would be an extension of the consumer finance business of MFIs, who have already gone beyond their traditional role by financing the purchase of mobile phones, water purifiers and even refrigerators and are seeking to expand their product offerings to compete with commercial lenders.
MFIs have built their success mainly on small joint liability loans that could range between Rs10,000 and Rs20,000 given to community groups to earn a livelihood. Such borrowers lack collateral and the credit history that banks require.
Home loans would be of a far bigger size—up to Rs3 lakh—and wouldn’t qualify as livelihood loans that are income generating and aid loan repayments. The risk of defaults is higher also because the borrowers would be individuals and not groups.
Madura Micro Finance Ltd and Bhartiya Samruddhi Finance Ltd have launched pilot programmes by giving home loans to around 100 customers each to gauge the viability of the business.
“We are still in the process of judging the feasibility of this offering,” said M. Narayanan, chief executive of Madura Micro Finance, which is doing pilots in Madurai and Salem districts of Tamil Nadu. “It’s not just about defaults. We have to doubly ensure that all documents are in place and insist on proper credentials. We also need a guarantor,”
The firm offers loans of Rs50,000 for home renovation and repair and Rs1 lakh for buying or constructing a house. To attract customers, Madura Finance is offering these loans at lower rates than group loans. While its lending rates for self-help groups are in the range of 18-21%, it is offering housing loans at 18%.
Bhartiya Samruddhi, part of the Basix Group, is offering home loans that have a duration of five-seven years, and the firm insists on collateral. “The need (for home loans) is huge. However, in this business defaults could be as much as 2%,” said S. Ramachandran, chief financial officer.
MFIs attribute their huge success to default rates as low as 0.01%.
Some MFIs are considering partnerships for entering this segment. Bangalore-based Ujjivan Financial Services Pvt. Ltd is in talks with a national housing company for a tie-up. Once the tie-up is in place, the firm will give home loans on an experimental basis. For Ujjivan, which is already offering loans for leases, rents and home improvement, home loans would be a natural progression.
“There are a few companies set up for offering micro housing loans and they want to work with us for extending such loans to our customers. We are looking at this, it’s all in early stages of it,” said Samit Ghosh, chief executive officer.
In their bid to lower risks, MFIs are looking at adopting technologies that would help in eliminating cash from the system.
Bangalore-based mChek India Payment Systems Pvt. Ltd and Grameen Koota microfinance institution are running a pilot to implement mobile payments in the micro-credit sector, which will help reduce disbursement and collection costs significantly.
Experts say MFIs are being prudent by adopting caution in entering the home loan business, given their lack of experience in the segment.
“MFIs can look at managing and sourcing portfolio for other lenders like housing financial companies, non-banking financial companies and banks. MFIs can source loans for customers and help service these to gain experience in this kind of business,” said Viren H. Mehta, national director at consultancy firm Ernst and Young India.