By Sankalp Baxi
‘Affordability’ can be defined as the consumers’ ability to purchase but it is a relative term that
could acquire different meanings under varying circumstances. With a bevy of real estate
companies riding on the wave of economic growth the focus on the “fortune at the bottom of the
pyramid” has become an important component of their strategy evident in numerous low price
housing projects sprouting across the nation. For instance Tata Group has come up with a project
at Boisar near Mumbai, Godrej Group is building a township outside Ahmedabad, Ansal
Properties is constructing homes for low income groups in U.P. and Rajasthan and the list goes
on and on.
However, the availability of adequate financing sources for the consumers is a major factor in
determining the sale of these projects. Thus, the role of microfinance institutions in enabling the
low income consumers, mostly employed in the informal sector in purchasing these “Affordable
houses” is of much importance. This is evident from the fact that real estate developers
constructing low cost housing projects are partnering with microfinance institutions like Micro
Housing Finance Corporation Ltd. (MHFC) and SKS Microfinance etc.
Demand for Affordable housing:
There is an enormous unmet demand for low-income housing finance. The segment earning
between Rs 7,000-Rs 15,000 has never been considered significant for home loan offerings.
While the prospects of getting a home loan for the formal sector employee do exist, chances for
informal sector employees and the self-employed like drivers, NGO staff, small caterers and
others are bleak. This is despite the fact that they have marketable skills, steady jobs/incomes
and employer/customer recommendations.
Moreover, urbanization has played a key role in making India’s housing problems worse. In the
present, scenario the total urban land is estimated at 2.3% of India’s total geographical area,
which accommodates 30% of population. Pressure on land and infrastructure is only going to
increase further with 40% of the nation expected to inhabit cities by 2020 at which time urban
population is expected to be 455 million. Apart from this, with 200 million people anticipated to
be living in slums and slum like conditions by 2020, the focus is bound to be on urban housing.
These people have the capability and willingness to make a 20%-25% down payment on houses
costing between Rs 4 lakh-5 lakh and are happy and able to take on a 15-year loan obligation, at
market rates, in order to realise their dream home. Given that in these small-sized homes, the
land cost represents a small percentage of the overall cost, the speculative risk is low, with a very
low probability of a drop in these property prices.
India’s housing shortage is estimated to be as high as 40 million units and demand from the low
income segment constitutes a large proportion of this shortage. Thus, the role of housing
microfinance becomes all the more important as a facilitator to bridge this demand supply gap.
Sources of finance for low income buyers:
Housing microfinance delivers housing finance to low-income people, typically but not
necessarily, without collateral specifically intended for housing-related endeavors, including new
constructions; repairs, improvements or up gradation of existing structures; purchase of land; and
investment in infrastructure. Banks face difficulty in financing the low income consumers mostly
employed in the informal sector terms of inability to accurately assess the credit risk associated
with low income borrowers, lower profit margins, lack of land titles, and uncertainty of
Hence, banks like HDFC indirectly fund the low income consumers by lending in bulk to
organizations like SEWA (Self Employed Womasn’s Association) and IASC (Indian Association
of Savings & Credit) which in turn lend to these borrowers. HUDCO (Housing Development
Corporation) and NHB (National Housing Board) undertake the financing and refinancing of
organizations engaged in lending to the low and middle income households. Certain housing
companies like Dewan Housing Corporation Ltd. are playing a major role in providing loans to
the low and middle income households.
Government also promotes the rehabilitation of the urban poor by financing the State housing
boards under policies like the JNURM (Jawahar Lal Nehru National Urban Renewal Mission) &
National Slum development Programme but the success of these policies is limited due to
corruption and nepotism.
Thus, Housing microfinance with longer tenor, flexible payment options, less stringent KYC
norms and lower interest rates acts as the ideal source for providing loans.
Partnership between Microfinance companies & Real estate companies:
“The biggest challenge for our customers is accessing loans – 1,700 out of 3,000 customers in
Phase 1 wanted loans and out of these 1,300 have got sanctions after 6-8 months. There are still
400 customers who are trying to get loans”- Joe Silva, Chairman and CEO, Matheran Realty Pvt
Ltd- Promoters of TMC.
The above statement highlights an urgent need for partnership between real estate developers and
the Microfinance institutions. A case in point is the partnership between Tata Housing
Development Company and MHFC (Micro House Finance Corporation Ltd.) for the New Haven
low cost housing project at Boisar 80 km from Mumbai. The model, offering apartments of 283
sq ft, 360 sq ft and 465 sq ft, in the price band of Rs 3.9 lakh-6.7 lakh, is being replicated across
tier I and II cities.
MHFC is the first housing company in the country dedicated to providing house loans to low
income individuals in the informal sector. Similarly an Ahmedabad based MFI has tied up with
TMC for the latter’s project, the company aggregates customers and determines their credit risk.
Challenges faced by the Housing microfinance institutions:
The road to financing low income consumers is riddled with roadblocks, the first challenge is in
terms of the availability of long term money of the tenor of 15-20 years due to the long term
payment option provided to the economically weaker sections and the second is in terms of the
cost of furnishing the loans.
Currently most Microfinance institutions have short term money in the tenor of 3-4 years at a
rate of 15% to 17% which could translate into loans at the rate of about 18%-19% to the low
income individuals which is quite high. Institutions like MFHC are currently lending from their
equity money but as they take on debt, the loans are bound to get pricier.
The NHB lends to microfinance institutions at about 10% which in turn lend to the borrowers at
about 12%-14% after taking into account the operating costs, credit and interest rate risks. Thus,
in the event of the interest rates being increased by the NHB, the MFIs would have to transfer the
additional cost to the borrowers to remain profitable. This could be unaffordable to them and
would lead to a lower demand for the affordable housing. NHB engages in refinancing of loans
but the interest rates are not fixed but reviewed periodically.
The road ahead:
The success of housing microfinance shall depend on the access to low cost funds and of longer
tenor. This could be facilitated by developing a deep long term debt market, where longer
horizon investors like pension funds can invest in the house mortgages. Mortgage guarantee
funds could also be developed where investors can pool their resources to lend to the mortgage
institutions. An apex body exclusively for financing the microfinance institutions could also be
set up under the supervision of the NHB; incidentally NHB is in the process of developing the
Mortgage Guarantee Corporation on similar lines.
Thus, affordable housing is bound to have a huge impact on the economy in terms of providing
quality life to the economically weaker sections of the society which will in turn improve the
quality of the work force, needed for the growth of the country and Microfinance institutions
have a mammoth role and responsibility as the catalyst for this transformation.
A report on low income housing: challenges and opportunities for microfinance by Centre for
The opportunity for urban low income housing projects by Ashish Karamchandani, Monitor
View expressed in this article are of author’s own.