[Case study] Housing finance for the poor: The India experience

  • Mona KACHHWAHA, Unitus Capital
  • Vinod KOTHARI, Vinod KOTHARI Consultants
  • Raj VERMA, Consultant, Ex Chairman, National Housing Bank

This was the last session of the Housing finance stream of EMW2020 devoted to the launch of the book: “Taking Shelter: Housing Finance for the World’s Poor”.

The case study started with a quick self-introduction of the speakers, after which Raj VERMA, consultant and former Chairman and MD of the National Housing Bank India, introduced the context opening with a quote of the American Sociologist Matthew Desmond:

“A national affordable housing program would be an anti-poverty effort, human capital investment, community improvement plan, and public health initiative all rolled into one.”

Following this inspiring quote, Verma described the impact of housing investments on the broader economy and society, in terms of employment generation, contribution to GDP, empowerment of the people and inclusive growth. According to Verma, much of the Indian experience resonates with the spirit of the quote. Aligned with this tenet, the Government of India adopted a number of measures for developing a sound, vibrant, sustainable and inclusive housing sector, and an efficient and well-functioning mortgage market. The Government of India launched an Affordable Housing Programme on national scale, particularly for the low and moderate income households, through a combination of schemes, including a credit-linked subsidy scheme. According to Verma, the successful history of housing finance in India can be explained by a combination of four main reasons.

First, Government policy prioritised the housing sector. For this, it was necessary to sensitise the Government to the need and cause of housing through strong and sustained advocacy, so as to project housing as a sector, critical to the development of nation and the people. This required a champion or promoter, a role that was fulfilled by the National Housing Bank (NHB). As a second pillar, institution-building was crucial, more specifically the reach and depth of channelling institutions for mortgages and mortgage finance, with the Government/Central Bank and the market playing a supportive role for the lending institutions. As they built their capacity, skills and expertise, the formal financial institutions reached out to the informal sector, through a deep network of branches and products. Regulators ensured that the businesses were prudent and sustainable. The apex statutory body NHB was a key player in the evolution of the mortgage industry, as it aligned the Government's policies and programmes with the market, and contributed significantly to institution-building.

Verma also highlighted a third reason: development of market infrastructure, specifically laws, rules, institutions, regulations and products to generate confidence among various stakeholders, lenders and investors, promoting business culture and mitigating risk for all actors involved. This market infrastructure has been a fundamental element in this success story as it provided a constantly evolving ecosystem to support and regulate institutions. Fourth and most important of all is funding, for which the trust and confidence of investors had to be captured and enhanced. Verma noted that a sufficient and sustained flow of funds is key to boosting the housing finance sector.

To further highlight why India is a remarkable case of growth of the housing finance sector, Verma shared that between 2000 and 2020 the value of outstanding loans grew enormously from USD 13 billion to USD 270 billion. In terms of affordable housing finance, banks’ lending to the low and moderate income group for affordable housing is now more than 60 percent of total housing loans, about 33 percent by specialised housing finance institutions. With better understanding of the informal market and the risk, the lenders’ interest in this market segment has grown over the years, particularly over the last decade. The Indian housing finance sector has seen growth of the informal sector in size, numbers, depth and geography, increasingly served by formal financial system, including through micro mortgages and microfinance products.

As Mona KACHHWAHA, from Unitus Capital, has been involved with the informal sector and micro-mortgages as an impact investor, Verma invited her to share her thoughts and experience on India’s housing finance case. According to Kachhwaha, the perspective and confidence of a funder stems from the four points that Verma mentioned at the beginning of the session. Highlighting her interest and engagement in affordable housing finance focused on the informal segment, she felt that the enabling environment is key for investors to invest in this market. According to her, what has given impact investors such as herself the confidence to invest in this sector has been the size and quality of the market.

There is currently a huge unmet demand for housing in India, and most of the people who are first-time homeowners value house ownership more than anything else, a house being their most precious and valuable possession. Given the high attachment to property, demand is really good and credit quality is robust, with low potential defaults. While working with the informal sector can be challenging, especially with regards to assessing incomes and repayment capacities of households, Unitus Capital’s experience in microfinance has demonstrated the creditworthiness of informal sector clients. Kachhwaha also stressed that while the availability of housing finance has grown over the last decade, unfortunately the supply side (the developers) has been rather slow in this market space. However, once credit started to flow in, the lending institutions observed a growing demand for self-construction loans, which from both lenders’ and regulators’ perspective is acceptable as long as it serves the housing needs. She expressed the view that the Investors continue to find the sector very robust and attractive, for sustainable business and impact returns on their investment.

Verma further shared with the participants that there has been great complementarity between the government and the market in the showcased case study. The government has allowed the market to grow; it has come in very selectively, but efficiently, and this is how the market has been able to grow so fast.

Vinod KOTHARI agreed with Verma, reiterating that the ecosystem of the mortgage industry has evolved over a period of time and has attained maturity. However, Kothari felt that there is a lot of room for improvement in certain spheres; given the size of the Indian housing market and huge demand. Referring to securitisation and digitisation, he felt that there is urgent need to further support and expand initiatives across the industry. Regarding securitisation, though the growth rate has been high in overall volumes across all sectors, mortgage-backed securitisation has seen low volumes. While housing finance securitization is the volume-puller in the rest of the World, it has small volumes in India. This has two implications: 1) the needed capital market integration of affordable housing finance providers is missing, resulting in limited capital market access to the smaller of the housing finance entities; and 2) securitisation itself remains limited to other asset classes. The Indian Government and Central Bank are very keen to promote securitisation in a big way; there is a move to have an intermediary, similar to entities elsewhere in the world, to facilitate mortgage securitisation. Also, according to him the housing finance system is still very polarised. There are more than a hundred housing finance companies, but only three account for the majority of the market.

Following Kothari's contribution to the conversation, Verma emphasised that, although there has been tremendous growth in the housing finance sector, both terms and conditions of housing finance as well as the pricing of houses are essential factors in decision making by the people to buy a house and take a mortgage. At times, these are challenges for affordability. Kothari argued that, to make housing more affordable, it is necessary to continue developing rental housing for which a better rental housing policy is essential. Verma endorsed his view, also considering the growing population of migrants in the country.

When asked by one of the attendees if a national guarantee fund existed in India and how successful it was, Verma replied that there is a Fund in place to guarantee default by borrowers, as a credit protection measure. The default was covered by the guarantee fund, supported by the Government of India, administered by NHB. He added that the mechanism has worked well, and that it is a great risk mitigant for the lenders, and also is cost advantage, since it is like a sovereign guarantee. Verma also highlighted that this credit default guarantee is extremely helpful to the system, though this has to attain higher scales. The Government is also currently evaluating how to combine it with other schemes.

To conclude, Verma highlighted that the housing finance sector in India is certainly an interesting case study. There are still many efforts underway and the roadmap is well established to continue growing dynamically. According to him, the Indian housing story is expected to expand and become more inclusive in the near future.