Lack of access to formal housing finance has been one of the toughest roadblocks in improving housing for low-income segments. As the housing finance ecosystem adapts to new opportunities in low-income housing, targeted interventions that build trust and connect disparate actors in the housing supply chain can bring transformative change. In recent years, the beneficiary led construction (BLC) vertical of India’s flagship affordable housing scheme Pradhan Mantri Awas Yojna (PMAY), has been one such opportunity. The India Housing Report is pleased to release a study titled A Partnership Approach: Increasing Access to Formal Micro Housing Finance for Low Income Households in Tamil Nadu, authored by the India Housing Federation (IHF). In this Q&A with the IHR team about the study, Institution Builder at IHF, Manikandan K. P. (Mani) points out the opportunities and insights that led to a successful housing finance intervention for BLC households.
IHR: To lay out the context, could you tell us what sort of housing finance challenge is faced by low-income households who are trying to reconstruct or add to their homes?
Mani: Low-income housing finance has multiple challenges. The first one is the informality of income. The entire housing finance business works primarily on evaluating the ability of the family to repay the loan and one of the ways to assess this repayment ability is to estimate the income earning ability of the family. Now the ability of the institutions to assess the incomes of the informal segment becomes subjective, posing a severe challenge in computing the quantum of finance.
Secondly, informal incomes can fluctuate. In comparison to families with a steady flow of income, there is higher variability in ability to pay regularly, month on month. Even though in practice, we have seen that collection rates from low-income segment are good, compared to those with stable incomes the risk is higher. Large, process-driven financial institutions would want documentary income proofs and would find it difficult to assess incomes without these. So, they do not really cater to those segments with lower income levels who derive incomes from informal sources.
Another challenge is regarding the quality of the title. As we go down the income pyramid, the quality of title [of the property] deteriorates and becomes increasingly informal. Without enforceable documents that clearly establish the link between the owner and the property, lenders are hesitant. These increasing realms of risk have inhibited lending to the informal low-income segment in housing.
IHR: Your report is focused on those financial institutions that do cater to low-income households. Could you tell us a bit about this ecosystem?
Mani: The financial institutions that are really working with this income segment are the ones we are now starting to call Affordable Housing Finance Institutions (AHFIs) and this is because they are in a position to underwrite the risk associated with this segment. These are predominantly Small Finance Banks (SFBs) or Affordable Housing Finance Companies (AHFCs)
Now, why are the small finance banks interested in this segment? If you see most of the SFBs were micro finance institutions earlier. Hence, they already have the experience of working with this client segment. Additionally, SFBs have a mandatory requirement of 75% being in priority lending as compared to only 40% for scheduled commercial banks. So, they have a higher need to get into the affordable housing segment, which they are already comfortable with.
AHFCs are in relative terms newer and smaller. Being late entrants into the industry, their cost of financing is higher compared to established banks. As a result, they need to price their loan higher. Now why will a formal client take a loan with higher interest rates? Therefore, AHFCs need to find customers willing to take and pay higher interest rates, which happen to be lower informal segment households. Hence, AHFCs are in this segment in addition to having a mission to serve this segment but also on business considerations.
IHR: Let’s shift gear a bit and turn towards the report. How did IHF find itself working in Tamil Nadu?
Mani: Prior to becoming IHF, we existed in the shape of the Housing for All program of Ashoka India, where our primary objective was to demonstrate what we called Hybrid Value Chains (HVCs). We wanted to enable businesses and social organizations collaborate to serve low-income markets. The DNA of IHF still remains the same, so our core skill is promoting collaborations between existing players and organizations.
Now that there are AHFIs working in the market, the informality of incomes is no longer a challenge at least in some evolved markets. We are not talking about families without repaying capacity, rather this is about those with the capacity but who are not able to demonstrate this. We believe if there is a family with income, there is a housing loan available for them. However, these lending institutions are struggling to find clients. In our exposure to the government’s Pradhan Mantri Awas Yojna (PMAY) mission, we also saw that the beneficiaries are looking for financial support to build their own housing. When we heard from the team at the Tamil Nadu Slum Clearance Board (TNSCB) that they were finding it difficult to identify and involve lending institutions for PMAY’s beneficiary led construction (BLC) component, we took it up as a challenge to demonstrate that such institutions exist and loans to this segment are possible. This is what triggered our collaboration. TNSCB’s progressive attitude created an opportunity for us to work on our mission of bringing stakeholders together.
IHR: Why did the BLC vertical of the PMAY become the focus of your intervention?
Mani: Of the four verticals of the PMAY, BLC is the one that has taken off the most. By virtue of its design, the BLC is – for all practical purposes – co-creating 65 lakh individual projects. And since it is all beneficiary-driven, the progress and completion rates are much higher and faster unlike large projects that typically take 36-48 months for completion. If families decide to construct, they can effectively complete their house within six to nine months. What makes BLC attractive to lending institutions is that the interaction between them and a beneficiary is set at a per beneficiary level. They go and meet a beneficiary who is a potential customer for them and decide on whether or not to go ahead in giving the loan upfront, at the underwriting stage, rather than carrying the risk throughout the entire duration of the project. The need is high, it’s a low hanging fruit, the probability of the success is high, and it gives the flexibility to lending institutions. There is room for many more institutions because you are looking at 65 lakh units pan India. So BLC becomes an ideal intervention to start the work of linking financial institutions to the PMAY.
IHR: Coming to this particular case study, what really stands out is that you identify the communication gap between the stakeholders within the government system and the lending institutions. How was that gap identified? Was that something you knew going in or that emerged from the intervention?
Mani: We knew from the beginning that the exposure of policymakers, administrators and officials within the state government missions has been limited to the formal sector and they have been unable to get mainstream banks to cater to the low-income sector. Moreover, lending institutions have been less exposed to opportunities in the BLC and Affordable Housing in Partnership (AHP) verticals of PMAY but have focused on the Credit Linked Subsidy Scheme (CLSS) vertical since the housing finance regulator i.e. National Housing Bank was driving it as the Central Nodal Agency (CNA) for CLSS under PMAY.
This is where we bridged the gap, by getting TNSCB to interact with appropriate lending institutions for the BLC vertical. In fact, we went one step further to bring in all kinds of institutions including the State Bank of India, to really demonstrate to the government how the response differs between larger and small financial institutions. Since response rates from the smaller institutions were higher, TNSCB was able to warm up to these institutions and become comfortable working with them, rather than just looking at large institutions like SBIs & IOBs of the world.
IHR: Why have the norms for priority sector lending not played an effective role in anchoring housing finance for the lower income segment?
Mani: This is largely because the priority sector lending norms for housing loans have fairly high upper limits. A Rs.25–35 lakh loan upper limit and Rs. 35–45 lakh property value limit in non-metros and metros , for instance, will require an income of approximately 75,000 per month, which is somewhere in the middle of the MIG group. The AHP and BLC segments are meant for those with incomes below Rs 25,000 a month and approximately a maximum Rs 12 lakh property value. When you have the limit at closer to 30 lakhs, the normal tendency of the banking system is to crowd at the higher limit. A bank is happier to do one loan of Rs 20 lakh and call it priority sector rather than doing ten loans of 2 lakh each, as it is operationally easier and perceived less risky.
IHR: To come back to the case study presented in the report, you write about implementing a collaborative governance model by understanding core competencies of the stakeholders. You present this rich stakeholder analysis as well. Could you walk our readers through this concept of collaborative governance and why do you think it worked in this context?
For any model to be sustainable and scalable we are very clear that it has to be in a position to withstand challenges and grow on its own. We need to have an answer to the question: What is in it for them? In the case presented here, we are very clearly addressing this for each and every stakeholder.
Beneficiaries, who have not been able to access finance, are benefited by gaining access to institutional funding. For the lending institutions targeting the lower-income informal segment, the entire low-income population was in some sense business potential. That is a huge number for them to work with. Now, if you can apply a filter or a funnel and give them real prospects, that makes life that much easier for them. That is what we have done, in the sense that we are only targeting those beneficiaries in the low-income space who have an allotment letter/ work order from the state government, a document which is worth the Rs 1.5 – 2.5 lakh subsidy that GoI and the state are offering. Beneficiaries are surely going to complete their houses if they are able to mobilize the balance funds. The state is able to run its subsidised housing scheme successfully and achieve the goal of completed housing for all. This sort of collaborative model evolved where there is a role for everyone to play by purely using their own core competency.
IHR: But how do they actually work together? Have you been able to create linkages through your interventions or is there now a process set up for continuing interactions between lending institutions and the TNSCB?
Mani: This has actually taken place at multiple levels. First was the mindset shift and I would say that, more than the numbers, we have achieved this shift with our activities. From being unaware of the opportunities available, stakeholders are now able to understand what needs to be done, their differentiated roles within the scheme etc. In our country, unlike the western world, we are still in the process of discovery in terms of how mortgage markets work for the lower income groups. In the West, standardized automated systems like credit bureaus have led to negligible product differentiation between lending institutions. In the discovery phase, we have institutions who can do different things, who are still experimenting with underwriting norms. Of course, achieving scale will take time, and we will have to handhold institutions to make connections. In the low-income mass housing space, we are still in early days and it is better to do this discovery process in an organic manner. The PMAY Mission phase helps in accelerating this discovery process.
IHR: What were the barriers in working with these organizations?
Mani: Building trust between different types of organisations is difficult, and that’s where IHF’s role has been critical. Typically, government institutions are comfortable with other government institutions but slightly skeptical about private institutions. We have a scenario where AHFIs are charging a rate of interest much higher than the public sector institutions. If mainstream institutions like State Bank of India is going to give a loan for a formal income client at 7 percent, AHFIs are charging a low-income client anywhere in the range of 12 to 18 percent. As I explained before, there are structural issues to explain this, including the cost of finance for AHFIs, plus operating cost is higher and then the risk/ perceived risk is also slightly higher. If you consider all this, you can empirically justify the higher interest rate being charged by AHFIs, but officials would still have concerns about whether they should be supporting private institutions to make profits, whether they are pushing poor people into a debt trap etc. IHF’s role has been around constructing a different narrative, one in which the AHFI offering is seen against the real experiences of low-income households, which include borrowing at 36 percent from the local moneylender or at 24 percent from microfinance companies that offer a smaller loan amount for a shorter duration. Compared to these, a longer-term loan at 12 to 18 percent from an AHFI looks like and is actually a better option. These are some of the communication gaps we needed to bridge. To add value, we created an interface for the officials and AHFIs to interact in a relatively less hierarchical manner.
IHR: The credit camp model seems to be a successful on-ground intervention. You were able to reach out to 3000 people in 45 days. How did this come about and what were the outcomes?
Mani: The camp model has been around for some time. Banks do camps with builders and developers all the time. We are not creating something afresh. In this case, we got the lending institutions to do the camps within the government setup in order to offer housing loans for PMAY beneficiaries. We were able to break the ice and create comfort at the consumer and AHFI end. We were fortunate to be able to organise these just before COVID struck and we plan to resume soon following all COVID related protocols. In the meantime, we are tele-calling and talking to the beneficiaries directly and getting bankers to do the same. In our intervention, we have really cut short the warming up period. Because TNSCB organised these credit camps on their premises, communication from participating AHFIs is being received by the beneficiaries with much more legitimacy. Of course, credit camps are not going to be the end solution, because we are talking about lakhs of beneficiaries, but they are making a huge impact in bridging the credibility gap. We hope that people will start talking about them and the credibility of these AHFIs will spread by word of mouth over time.
IHR: You have done a lot of the work with the government and lending institutions. What were the challenges at the beneficiary end?
Mani: The challenge of proving financial credibility remains but you have to look at how the BLC process would have evolved from the beneficiary point of view. In 2015-16 when PMAY started, a survey was done and people filled out forms. Pretty much everyone would have filled it, because it was a simple activity with hardly any expectations. With the enhanced focus to meet the goal, people started getting letters, an order from TNSCB saying that they have been identified as a beneficiary, and that they will get a certain subsidy under the scheme that will be released in four stages as they demonstrate progress in construction. People start believing that the paper in-hand is actually in some sense a cheque for Rs 2,10,000 but then if they need to encash it, there are some stipulations and conditions. They need to bring in the balance money, but they do not want to pay the high interest rates of informal finance and cannot prove their credibility to formal banks. Unfortunately, they are not aware of the AHFI options, which is the gap we are bridging.
We are offering a middle ground by enabling access to structured formal finance. It might be priced slightly higher but then a loan is being made possible at a price better than their next available option. That is the shift which we have brought about. We have moved several people who were on the threshold, into the formal system. This shift needs to happen over the period of time and then it will have a multiplier effect.
IHR: A last broad question on regulation. What do lenders feel about the architecture for low-income housing finance?
Mani: The larger architecture has been predominantly same, but lending institutions were just busy with the higher end of the income spectrum. Until now, newer institutions would enter and also try to crowd at the higher end. Now in the last few years, because of the real estate market slowing down, the hype is fading and the reality is emerging. Slowly institutions are looking at segments below their existing comfort zones. As larger institutions start looking at areas which they hitherto have not entered, the pressure on the organizations which were operating on that lower segment will also start increasing. As a result, they are being pushed down market and are exposed to newer challenges. This is where some of the new policy initiatives and institutional support are required to truly invigorate the low-income housing market.