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Micro Housing Finance Corporation (MHFC) – affordable housing for the financially excluded

The Challenge

India’s national housing shortage is estimated at 18.78 million homes, according to Government of India’s Ministry for Housing and Urban Poverty Alleviation. Housing should be a fundamental right as it affects core human issues – quality of life, security, and basic dignity. Unfortunately, low-income households are unable get access to proper housing due to adverse demand side (exclusion from traditional channels of finance for home purchases, especially for those without documentation to prove incomes) as well as supply side factors (lack of adequate supply of product suited to this segment from developers), which results in homelessness, congested living, slums and squatter settlements.

MHFC and its Objective

MHFC is a housing finance company headquartered in Mumbai, which commenced operations in June 2009. The objective is to build an ecosystem of low-income housing by providing housing loans to financially excluded urban poor, particularly those employed in the informal sector to help them own an independent home. Through this initiative, it seeks to efficiently and sustainably enable access to housing finance services to the underserved and un-served segments of the urban population. Their customers are a mix of self employed micro-entrepreneurs (e.g. vegetable vendors, electricians) and unorganized sector salaried workers (e.g. drivers, housemaids), currently living in rental housing or illegal tenements and earning a combined household average income of between Rs. 8,000 and Rs. 25,000 per month. The organization works  in parallel to screen housing projects that meet its parameters – essentially good quality, clear title, affordable housing, in urban areas – and also promote supply creation by developers for this segment. It now has 150 projects that it has approved and partnered with in Tier 1 & Tier 2 cities in Maharashtra, Gujarat, Madhya Pradesh, Rajasthan, Chattisgarh, and West Bengal.

Business Model

MHFC has modeled itself on regular housing finance companies but also borrows techniques from the microfinance industry, particularly its focus on, and closeness to the customer to provide market based solutions to address the lack of housing for the low-income unorganized sector in urban India. Its business is project driven, i.e it only services customers that have chosen to buy homes in housing projects where MHFC has collaborated with developers with a similar focus on affordable housing. The typical project is located in the outskirts of the city but with good transport linkages so there is accessibility to the workplace. It has a stringent builder and project due diligence framework, which will not only evaluate the technical and legal parameters of the project, but also the social infrastructure like schools, hospitals, and markets to ensure that buyers are empowered to improve the quality of their lives.

MHFC loans are long-term (maximum 15 years tenor) micro-mortgages for need based housing. The loan size is up to 85 % of the cost of the flat, normally in the Rs.5 lakh range and does not exceed Rs.10 lakh. It lends at an average interest rate of 13-15% p.a. (reducing balance), with a 2% benefit rate relaxation for women and weaker sections (as defined by the Govt of India), against the security of the house being bought. The mode of repayment is through monthly payments via automatic electronic clearing system.

The Innovation

MHFC is flexible in its documentation procedure, given that in the informal market where it operates, customers have neither an income certificate (because they are self-employed), nor do they file tax returns (because they fall below the taxable income range). The crucial factor in MHFC’s operations is thus the ability to judge a client’s creditworthiness in the absence of the regular documentation. By developing a credit model that is capable of assessing customer incomes and understanding the risks associated with lending to the unorganized sector, MHFC is able to offer a high quality, competitive mortgage loan product to this segment. It has devised its own benchmarks for estimating cash flows for over 200 varied professions and trades, from street vendors to embroidery workers to someone in the business of repairing pumps, but the model is also based on intensive customer engagement. MHFC visits the prospective customer’s workplace to understand what the customer sells and at what price, the volume, the suppliers, and any applicable costs. A storyboard on the customer’s income and business is then created by calculating daily and monthly cash flows, which are cross-verified. A customer’s reasons for investing in a home are also closely examined. If someone has decided to upgrade from a slum to provide better housing for his school-going children, for example, it is a promising indicator of the customer’s willingness and ability to repay.

The entire process from origination to sanction, takes usually less than seven days for cases which have absolutely no income documentation.

Corporate Partnerships

MHFC believes that to create meaningful social change through access to housing for low income households, it will need to play a key role  in helping build the overall ecosystem of affordable housing as well. As highlighted earlier, the gap in housing solutions for low-income households is not just an issue of financing, but much to do with availability of affordable, suitably designed products as well. Also to this end it works in partnerships with developers, corporations, banks, microfinance institutions, and policymakers to promote financial inclusion and support housing solutions for low-income households.

MHFC has partnered with both well established and up-coming developers, who have a shared vision of providing high quality, low cost homes at affordable, yet competitive prices to lower-income families in urban India. Given their exclusive focus on the low income housing market, they focus on developing long-term relationships with developers building in this space, offering both advice and insights on the market and helping identify specific customer segments for potential low-cost housing projects. In some cases, MHFC also assists developers in sourcing customers for a specified number and type of flats, ensuring end users rather than investors, a further value-add for developers. Key corporate partners include builders like Tata Housing Development Co. Ltd. (Tata Housing) and Poddar Developers; to date, MHFC has partnered with builders on over 150 such projects.

For eg – it is collaborating with Tata Housing on its recently launched “Shubh Griha” project spread across 135 acres in Ahmedabad, which caters to MHFCs customer segment. “Shubh Griha” will follow an integrated township approach to create a positive ecosystem for the neighborhood and the community and the apartments are priced between Rs.8 lakh and Rs. 12.33 lakh. For this project, MHFC will finance customers who are not able to easily access housing loans from the mainstream banks mainly due to levels of income and also because of the lack of documentation, especially regarding proof of income. Buyers of “Shubh Griha” projects are allotted through a public lottery process, since applications far exceed the flats on offer, but given MHFC’s focus on families that are financially excluded and need primary housing urgently, Tata Housing has allotted a special reservation of 100 flats for MHFC customers.

This partnership is in continuation of its close relationship with Tata Housing, and previously the company has had successful tie ups on Tata Housing projects at Vasind and Boisar, where flats were allotted through the lottery system as a result of over subscription but approximately 200 flats were reserved for direct allotment to MHFC customers. MHFC has had similar partnerships with Poddar Developers where they reserved 64 flats in one project in Bhivpuri for direct allotment to MHFC customers.

MHFC has also partnered with both corporate and non-profit organizations in an effort to reach out to its target segment and spread the word about both affordable housing projects, as well as housing finance options among the informal sector. Advertisement in newspapers are not very useful given their target segment may not read the same papers. The marketing strategy adopted is building partnerships with large companies/employers in the telecommunication, hospitality and F&B industries (among others) such as Tata Sky, Pepsi, and the WestIn Group, to offer their services to targeted customers who receive undocumented income in the companies’ supply chain. These potential customers who live and work in informal settlements further help spread the word among households looking for affordable housing and encourage them to apply for housing loans.

Key Lessons

What has worked?

In most of the affordable housing projects that MHFC has partnered with developers, it has received an overwhelming response. One of the major challenges for a low income housing developer is targeting the right segment at the bottom of the pyramid, i.e. end users who need homes but are hesitant to come forward due to the lack of finance available. The tie up with MHFC for providing easy housing loans with flexibility in documentation requirements, to the lower income group has been a great advantage and successfully addressed this gap.

Another reason for success of these alliances is that developers have been proactive in doing bookings for MHFC customers and they ensure the apartments go to those who want to live in them and not to investors. Instead of adopting a branch model, MHFC’s loan officers are positioned on-site at various projects, enabling ready access to MHFC for both the customer and the developer.

What has not?

One downside of project based (corporate tie-up) approach has been when flats were reserved for MHFC customers without entering them into the lottery and the project gets delayed or abandoned, the costs escalated and it became difficult to find a replacement housing for them since the supply was limited in that price range.

The Impact

MFHC has sanctioned 4,000 loans worth close to Rs. 200 crore so far, with an average loan size of Rs.5 lakh. These loans have been given to financially excluded lower-income families, mostly employed in the informal sector, helping them improve their quality of life and live with dignity in a secure and clean environment.

The partnerships with developers have played a significant role in creating this social impact while they have been beneficial for both MHFC and its corporate partners. MHFC has attained reasonable success through these partnerships in building an ecosystem for supply of good quality and affordable housing for the financially excluded. If not for MHFC and its partner developers, a lot of the beneficiaries would not have had access to housing loans and therefore, to affordable, quality homes. The partnerships have also helped MHFC drive their business growth, receiving assured supply of housing in a segment where there is limited inventory. MHFC’s marketing collaborations with companies has provided a cost-efficient opportunity for reaching to their customer segment. At the same time, developers have benefited as a result of assured clientele from MHFC. They have also been able to participate in creating social impact by reaching a new customer segment from the informal sector, which they traditionally would not have been able to access.

 

Acknowledgement

We thank Mr. Rajnish Dhall, CEO/MD of MHCF for his time and inputs.