Affordable Housing Finance

India’s housing finance market is worth an estimated Rs. 9.7 trillion and has achieved steady growth over the last 3 years. The market is dominated by a handful of banks, accounting for close to 70% of the market. However, the housing finance market continues to face considerable supply constraints, particularly in the lower income segment due to the perceived high risk of lending to the informal sector. A low income household is classified as one with a monthly household income below INR 20,000 and price per dwelling unit below INR 10 lakhs. The lower-income housing market is worth over Rs. 1,100,000 crore, comprises of approximately 2.2 crore households and consists of both salaried and self-employed individuals. The housing finance market in India has the potential to expand and include these borrowers who are currently not being serviced by financial institutions. These are individuals in the lower income segment that generally do not have formal proofs of income, a challenge for larger Housing Finance Companies (HFCs). This has paved the way for new entrants in a niche segment within the housing finance market, the affordable housing sector.

The rapid pace of urbanization, combined with rising income levels across the country continue to drive demand for affordable housing, to the extent that supply has not been able to keep pace with demand. In a bid to encourage greater supply, the Reserve Bank of India (RBI) has recently relaxed its guidelines regarding external commercial borrowings for the purpose of onward-lending for low cost housing units. Earlier this year, the National Housing Bank (NHB), a wholly-owned subsidiary of the RBI, slashed refinancing rates on loans up to INR 5 lakhs, incentivizing primary lending institutions like banks and HFCs to lend more to low-income households. The country also witnessed the first mortgage guarantee company – an initiative of International Finance Corporation (IFC), Asian Development Bank (ADB) and NHB.

Traditionally, banks have been the largest player in the housing finance market, and they continue to hold close to 70% of the total home loan portfolio in India. The other players in the market include: HFCs, land development banks and housing societies. The National Housing Bank (NHB) was set up in order to accelerate housing finance activity in India and promote HFCs. Although their market share has been steadily growing, 37% as of October 2014, the majority of housing loans disbursed remain in a higher loan bracket of over INR 10 lakhs, according to NHB. Home loans below INR 10 lakhs, categorised as the low income housing market, provided huge opportunity for the existing as well as new HFCs. HFCs with a strategic focus on financing low and middle income segments in the informal sector have come to be known as ‘Affordable Housing Finance Companies’ (AHFCs).

The Affordable housing finance market can be segmented based on the target market it is catering to and the home loan size. The aggregate AUM of all AHFCs is estimated to be INR 20,000-21,000 crore. Within this segment, large HFCs dominate the market, catering to borrowers in the formal sector who are able to produce documented proofs of income. Excluding DHFL, GRUH and Mahindra Rural Housing, who collectively account for more than 90% of the market share, all other AHFCs manage less than INR 500 crore of assets, individually. Semiformal and informal sectors remain largely under-served; this is especially true when the loan requirement falls below INR 7 lakhs. AHFCs rely on their ability to assess the clients’ income, develop templates to understand the margins and cash flows of local businesses, and have a strong in-house process of credit and security verification. The number of AHFCs in this market and their assets under management is very small in proportion to the demand – presently, they collectively manage less than INR 4000 crore.

Given the higher concentration towards the formal, higher income segment, immense opportunity lies ahead for players who develop a sustainable business model in lending to the informal market. The market has witnessed both existing NBFCs floating new subsidiaries to specialize in affordable housing finance (Magma, Au, MAS, Equitas etc.), as well as new HFCs coming up with an exclusive focus on affordable housing finance (MHFC, Aptus, Shubham, India Shelter etc.). Currently there are 63 HFCs registered with the NHB. There has been significant equity interest within the sector – early stage investors such as Sequoia, Nexus, Elevar, Caspian, MSDF etc. have taken equity stakes in AHFCs. Recent investments made include INR 122 crore invested in Shubham Housing Development Finance by Motilal Oswal along with Shubham’s existing investors. Aptus Value Housing Finance Company also saw an equity infusion from West Bridge along with existing investors.

The borrowing profile has evolved over the years as housing finance companies mature, moving from bank funding to capital market products as the company demonstrates significant vintage in the sector. Market borrowings in the form of non-convertible debentures, ECBs, commercial papers have recently gained traction among the larger HFCs in the affordable housing finance sector. However, the relatively more expensive business model restricts the company from availing of NHB refinance facilities under the different schemes. Most small to mid-sized HFCs are relatively well capitalised with debt-equity at an average of 5-6x, majority of them continue to be funded through equity.

Higher dependence on wholesale funding sources: HFCs haven’t been able to diversify their sources of lending and continue to depend largely on banks and NHB to meet their disbursal targets. A relatively high degree of concentration and dependence on banks and NHB for funding remains a challenge, particularly for smaller HFCs. The lack of long term funding to HFCs poses considerable liquidity challenges.

IFMR Capital believes that the affordable housing finance market will achieve tremendous growth over the next few years, given the low base/shortage of supply and huge demand. Majority of HFCs in this space have stabilized operations and have witnessed excellent asset quality. At the same time, concerns on areas such asset liability management, access to a diversified investor base, rating limitations etc. persist.

Given the considerable gap between supply and demand in the affordable housing finance market, there is still opportunity for new HFCs to enter the market while the existing HFCs continue to grow. Access to capital will be crucial to the growth of these HFCs in India. IFMR Capital’s strategy and interventions/products are designed to address these concerns. Given the inherent limitations of domestic debt markets in providing access to long term finance, as well as to lower rated institutions, IFMR Capital’s focus is on developing transaction structures with sufficient structural risk mitigation in order to incentivize investors to provide credit. IFMR Capital has already channelized more than INR 1200 Cr in the housing and mortgage lending space through structured finance, as well as plain vanilla products.

The securitisation of affordable housing loan pools and mortgaged loans has been critical in providing co-terminus funding. This has enabled Mutual Funds to invest in NCD and CP issuances by HFCs, diversifying the lender and debt product profile, a key achievement, in addition to making public sector banks accessible to these HFCs.

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