Kolkata: The origin of the current crisis in the global financial system may lie in so-called subprime mortgages sold by US banks, but several Indian housing finance and microfinance companies of recent vintage are looking to offer subprime mortgages in India—although they aren’t calling it that.
Instead, they call it “inclusive lending”.
Government-owned funding agencies such as the National Housing Bank (NHB) and the National Bank for Agriculture and Rural Development (Nabard) are making funds available to these housing finance companies and microfinance institutions to lend to people who cannot borrow from high-street banks.
“The people we are targeting are neighbourhood cigarette walas (or those who hawk cigarettes), taxi drivers, vegetable vendors and so on, who might be earning around Rs10,000 a month, but cannot borrow from commercial banks because they cannot furnish the required documents,” says Rajnish Dhall, co-founder and director of Micro Housing Finance Corp. Ltd (MHFC), a Mumbai-based start-up that plans to lend Rs3-5 lakh to borrowers to buy 300-500 sq. ft flats.
Homes for masses: Janta flats at Narela in Delhi. Developers are required to reserve a part of their projects for low-income groups, but there still aren’t enough 300-500 sq. ft flats. This affects housing finance companies.
Dhall, an Indian Institute of Management, Ahmedabad alumnus, quit American Express Bank Ltd two years ago and returned to Mumbai to set up MHFC in partnership with former colleague Madhusudan Menon and the Monitor Group, an American consulting firm.
The company, which recently secured licence from NHB to start lending, has a paid-up equity of Rs5 crore. It has some Rs3-4 crore at its disposal to start its business, and expects to infuse more money into its operations by June.
MHFC has an ambitious target of financing up to 1,500 people in its first year of operation. The interest rate, according to Dhall, will range between 12% and 14%, whereas commercial banks lend up to Rs5 lakh at 8% or thereabouts. The higher rate is on account of higher credit risk or defaults. And MHFC won’t lend more than 75% of the price of a property.
Ahmedabad-based MAS Financial Services Ltd has also obtained licence from NHB to start a similar business. Its managing director Kamlesh Gandhi says that until lately, demand for housing was so strong that housing finance companies could afford to ignore people who weren’t “creditworthy”. “But now, with demand weakening, people who are financially weaker and typically buy flats to live in and not for investment, are becoming more important.”
Both MHFC and MAS have entered into an arrangement with Matheran Realty Pvt. Ltd, a real estate developer that is building 2,000 flats, each between 300 sq. ft and 700 sq. ft, in Karjat, a Mumbai suburb, to lend to buyers. Matheran Realty has received some 70,000 applications for its Karjat property, according to Dhall, “which is an indication that demand for housing in this segment is huge”.
But there aren’t many real estate developers yet who are interested in building homes for the masses. Despite the Union government’s insistence that real estate developers reserve a portion of each housing project for people from the low-income group, one of the biggest problems facing housing finance companies such as MHFC and MAS is the paucity of 300-500 sq. ft flats, says Dhall.
Availability of such flats, however, will increase once slums are redeveloped—a process that is happening or will soon start happening across the country.
Most of these housing finance companies are looking to tap private investors for money, but they could draw funds from NHB, too, which is offering to lend to them at 8-10%. NHB’s chairman and managing director S. Sridhar says the bank has sanctioned loans amounting to Rs80 crore to nearly 20 microfinance institutions.
However, some microfinance institutions say they cannot afford these rates and would prefer to borrow from Nabard instead, which is offering loans at 5.5% under a scheme launched a few months ago.
Though cheaper, however, Nabard’s money comes with several riders. Microfinance institutions borrowing from it can only lend in rural markets and only up to Rs1 lakh to each person. They cannot charge above 9% interest, and the loan tenure cannot exceed 10 years.
“Despite the riders, it’s an interesting proposition,” says Chandra Sekhar Ghosh, managing director of Kolkata-based microfinance institution Bandhan, which plans to draw funds from Nabard and offer home loans in a few districts of West Bengal. “We are going to do a pilot (project) in districts that we know best to assess demand, costing and overall viability, before launching the scheme across the country.”
Asked why Nabard chose microfinance institutions to lend to people buying homes, P. Mohanaiah, Nabard’s chief general manager in charge of eastern India, said the cost of delivery through high-street banks and regional rural banks is higher because of higher administrative costs. “In some cases, it could have even gone up to 15%, and people might not have taken loans at that rate.”
Analysts admit that the credit risk in the segment chosen by these housing finance companies and microfinance institutions is higher and that it might be difficult to repossess properties from defaulters. The companies themselves claim delinquency is not going to be higher than 1.5% of money disbursed—roughly the same level as in home loan portfolios of most banks.
“People would actually live in the flats they buy with loans from our company,” says Dhall of MHFC. “So, we think that the customer would repay the loan at any cost because there is a lot at stake, which includes the margin money he pays upfront.”
A recent study by London-based investment bank Noble Group Ltd showed that personal savings rate in India for fiscal 2007-08 was around 38% of the country’s gross domestic product (GDP), whereas in the US, it was 3% in the last quarter of 2008. Also, the mortgage to GDP ratio for the US stands at around 70% currently, whereas the same ratio for India is a mere 5%, indicating that Indians are less indebted, at least at a personal level, than Americans. These indicate that risks involved in so-called subprime lending in India may be much lower than in the US.