Ashish Karamchandani

The Opportunity for Urban Low Income

Housing Finance

Microfinance India Summit 2009

Copyright © 2009 by Monitor Company Group, L.P.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means —electronic, mechanical, photocopying, recording, or otherwise — without the permission of Monitor Company Group, L.P.

This document provides an outline of a presentation and is incomplete without the accompanying oral commentary and discussion.

2 0 0 9AMSTERDAM

BEIJING

CAMBRIDGE

CHICAGO

DELHI

DUBAI

FRANKFURT

HONG KONG

JOHANNESBURG

LONDON

LOS ANGELES

MADRID

MANILA

MOSCOW

MUMBAI

MUNICH

NEW YORK

PALO ALTO

PARIS

SAN FRANCISCO

SÃO PAULO

SEOUL

SHANGHAI

SINGAPORE

STOCKHOLM

TOKYO

TORONTO

ZURICH

October 27, 2009

Copyright © 2009 Monitor Company Group, L.P. — Confidential — IND2

Monitor Group: An Introduction

Michael Porter,Harvard Business SchoolDirector and Co-Founder

of the Monitor Group

Founded by renowned academics, the Monitor Group has grown rapidly to become a leading global management consulting firm

We believe that “Ideas can create impact”We believe that “Ideas can create impact”

Founded by Michael Porter and other HBS faculty in 1983

Renowned for focus on strategy and cutting-edge ideas that help clients grow

With over 25 offices across the globe, we go the last mile…With over 25 offices across the globe, we go the last mile…

CorporatesCorporates GovernmentsGovernments Non ProfitsNon Profits

• Growth Strategies•Leadership & Innovation• Private Equity Funds

• City Strategies• Cluster Development•Country Competitiveness

• Social Venture Funds• Impact Investing• Education Ecosystem


Monitor Inclusive Markets in India

An autonomous unit that is actively facilitating scaling of An autonomous unit that is actively facilitating scaling of

market based solutionsmarket based solutions

CustomersCustomers

DevelopersDevelopers

Financial InstitutionsFinancial

Institutions

Construction Technology

Construction Technology

Identifying and refining business models at scale

Making the market for low income housing in India since 2006


Current Urban Housing Market: Smallest house costs

~ Rs. 5 Lakhs

Source: NHB Trends in Housing; CRIS Infac Report; Monitor Research

Urban India — Expenditure & Income Pyramid

16%(10MM)

37%(~23MM)

33%(~21MM)

14%(~9MM)

MHE: <Rs 2,500 pm

MHE: Rs 2,500–

Rs 4,575 pm

MHE:Rs 4,575–

Rs 9,625 pm

MHE: >Rs 9,625 pm

Monthly Income

Rs. 11,000

Rs. 2,500

Rs. 5,000

LESS THAN TOP 16% of Urban Indian LESS THAN TOP 16% of Urban Indian

Households can afford to own housesHouseholds can afford to own houses

LESS THAN TOP 16% of Urban Indian LESS THAN TOP 16% of Urban Indian

Households can afford to own housesHouseholds can afford to own houses

Current segment served

Ahmedabad / Vadodara

Mumbai

Jaipur

Hyderabad

Multiple builders: “Three room” flats @ Rs 950 / sq. ft.– Vatwa, 12 km from city

centre; 40 minutes travel, Naroda

Land rate of 80L to 1.1 Cr per acre available 45 minutes to 1 hour from city center, FSI of 1.8 given for 60% of the plot size1

Multiple builders: “Three room” flats @ Rs 950 / sq. ft.– Vatwa, 12 km from city

centre; 40 minutes travel, Naroda

Land rate of 80L to 1.1 Cr per acre available 45 minutes to 1 hour from city center, FSI of 1.8 given for 60% of the plot size1

1RK flat at Karjat, (Mumbai suburb) being sold at Rs 999 per sqft

Land rate of 0.6 -1.2 Cr per acre available in Titwala, FSI norm of 1

1RK flat at Karjat, (Mumbai suburb) being sold at Rs 999 per sqft

Land rate of 0.6 -1.2 Cr per acre available in Titwala, FSI norm of 1

Potential to provide housing at Rs 800–Rs 1000 per sq.ft. However, overriding concern is financing of these houses

Potential to provide housing at Rs 800–Rs 1000 per sq.ft. However, overriding concern is financing of these houses

1BHK flats (450–500 sq. ft.) being sold at Rs 900–1,200 per sq. ft. in areas such as Uppal, L B Nagar, Kuthapet, Kukatpalli etc. but not on a large scale.

1BHK flats (450–500 sq. ft.) being sold at Rs 900–1,200 per sq. ft. in areas such as Uppal, L B Nagar, Kuthapet, Kukatpalli etc. but not on a large scale.


The Opportunity: Smaller houses using current private

sector construction practices

Source: NHB Trends in Housing; CRIS Infac Report; Monitor Research

Urban India — Expenditure Pyramid

16%(10MM)

37%(~23MM)

33%(~21MM)

14%(~9MM)

MHE: <Rs 2,500 pm

MHE: Rs 2,500–

Rs 4,575 pm

MHE:Rs 4,575–

Rs 9,625 pm

MHE: >Rs 9,625 pm

Monthly Income

Rs. 11,000

Rs. 2,500

Rs. 5,000

Target segment for this project

250-400

sqft. houses

250-400

sqft. houses

Potential to provide housing for over 20 Million urban householdsPotential to provide housing for over 20 Million urban households

Cost Structure

Rs 150-250

Land &

Legal

Rs 25

Design

Rs 550-650

Construction Costs

Rs 70-100 Rs 10-25

Infrastructure Costs

Marketing

Rs 15

Salaries1

Rs 25-60

Interest2

Rs

200-300

PBT3

Rs.

1100-1400

Total

Operating ProfitabilityProject IRR 30-40%

Confidential

Copyright © 2006 Monitor Company Group, L.P. — Confidential — INDBZR-SAB – IFC Working Lunch – MK – 10/25/07 6

Low income, not Low Cost or Low Quality: Mock Apartment,

Mumbai

Confidential

Copyright © 2009 Monitor Company Group, L.P. — Confidential — MUM7

Appalling conditions of Slum-

Dwellers

Appalling conditions of Slum-

Dwellers

Customer Perspective: Social Need and Willingness to Pay

(16 Focus Groups and over 2,000 potential customers)

Detailed customer research and our interaction with customers on the ground showed high need for a “house of their own” among people living in appalling living conditions

Steady job as a factory worker in a textile enterprise in Ahmedabad

Monthly HH income ~ Rs 8,000, savings up to Rs 900 – 1,000 p.m.

Profile - NathubhaiProfile - Nathubhai

Source: Primary Research (n=2000), Monitor Analysis

Self-employed Mechanic in Mumbai Monthly HH

income ~ Rs 11,000, savings up to Rs 1000 p.m.

Lives in 150 sq. ft. room in slums, Rent Rs 2,400

Married with 2 children Assets – Bank Account, LIC (Rs 1.5L),

Refrigerator and PC Education: Both children attend

English-medium school Rent: Has seen significant & frequent

increases in rent, has moved house 5 times in 12 years

Profile - GaneshProfile - Ganesh

Both share a dream…“A house of their own”Can afford a 250-350 sq ft. house, willing to make 20% down payment &

pay 35% of monthly income as EMIs to realize their dream

Both share a dream…“A house of their own”Can afford a 250-350 sq ft. house, willing to make 20% down payment &

pay 35% of monthly income as EMIs to realize their dream

Lives in 1 RmK in low income neighborhood, Rent Rs 1800

Family size: 5 (mother, wife, 2 children) Assets – Bank Account, LIC (Rs 3L), TV Education: Both children attend private

Gujarati medium schools Rent: Increased by 50% in past 3 years,

has moved every 2 to 3 years

Live in poorly Live in poorly constructed small constructed small cramped housescramped houses

Poor sanitary Poor sanitary conditions - conditions - shared toilets, bad shared toilets, bad drainage, water drainage, water logging during logging during monsoonsmonsoons

Lack of facilities - Lack of facilities - properly planned properly planned access points, access points, walkways, walkways, gardens, gardens, dedicated schools dedicated schools etc. etc.


Increasing supply of housing but lack of access to finance

Ahmedabad: Vatva

Taral Bakeri

Phase 1: 800 units

Price: Rs 3.3 Lakh– 5.6 Lakh

Mumbai :Ambivili

Neptune Group

100 acres

Phase 1: 1800 units; Sector 1: 600 flats sold out in 3 days

1-BHK and 2-BHK

Rs 4.73 Lakh and Rs 8.40 Lakh

Maharashtra: Karjat

TMC – Matheran Realty

15,000 units by June 2011;

3,000 units in Phase 1 –

June ’09

6,000 flats @ Rs 3 Lakh

Maharashtra: Boisar

Tata Housing

67 acres: Phase 1: 1200 units for LIH1-RMK and 1BHK

Rs 3.9 Lakh and Rs 6.7 Lakh

Bangalore: Atibele

Janadhar

11 acres: 1500 units1BHK and 2 BHK; Rs 4 Lakh and 6 Lakh

Bangalore: Value Budget Housing

Development Corporation

Rs 3-9 Lakh townships on minimum 10 acre plots; 1 Million intended flats

Large real estate players like the Tatas and entrepreneurs like Jerry Rao are starting to recognize the business Large real estate players like the Tatas and entrepreneurs like Jerry Rao are starting to recognize the business potential of low income housing and constructing large projects, thereby giving the field increased credibilitypotential of low income housing and constructing large projects, thereby giving the field increased credibility

There is increasing construction of low income projects across India but access to home financing for low income customers is the major choke point

• ““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 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- 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.Promoters of TMC.

• ““We find many people willing to buy our flats in Ambivilli like drivers, shop keepers and even priests, however their biggest problem is accessing We find many people willing to buy our flats in Ambivilli like drivers, shop keepers and even priests, however their biggest problem is accessing finance in buying our flats”- Nayan Shah, Director of Neptunefinance in buying our flats”- Nayan Shah, Director of Neptune

• ““Ever since we launched, we have been getting enquiries almost every day on housing loans from informal sector customers. The challenge has Ever since we launched, we have been getting enquiries almost every day on housing loans from informal sector customers. The challenge has been to service all such requests”- Rajnish Dhall, Promoter MHFCbeen to service all such requests”- Rajnish Dhall, Promoter MHFC

Source: Monitor Research

Ahmedabad: Vatva

Foliage Developers

Phase 1: 400 units

Price: Rs 2.81 lakh upwards


Largely Un-servedSome PSU schemes, but difficult to access loans due to bureaucracy; staff incentives geared towards disbursement targets

Barriers to entry for Banks and Housing Finance Companies

The majority of Banks and Housing Finance Companies are reluctant to serve customers in the informal sector because of the uncertainty of their risk profiles

Difficulty of Assessing Risk

Ticket Size

10 Lakhs

5 Lakhs

Formal‘Semi-formal’Informal

Paid / earns in cash

No formal income documents

No formal residence/identity documents

Salaried with pay slip

Income Tax documents

Residence Documents

Identity documents

Bank account

Salaried or Self Employed

Significant proportion of undisclosed income

Some residence/identity documents

Low-end focused HFCs (e.g., MAS)Limited geographic coverage & capacity

Trying to move to higher ticket sizes to

increase profitability

Source: Monitor Research

Select HFCs (e.g., DEWAN HOUSING)Alternate means of income assessment for higher income customers such as supplier and customer checks, or MFI and chit fund savings history; guarantor typically required

2 Lakhs


A Low Income Housing Finance Business: Outline

Urban The need for low income housing and home loan financing is especially acute in urban areas, which are seeing rapid population expansion through migration from rural areas

Reach: The HFC will have an urban focus and will establish presence in Metros and surrounding Tier I/II/III cities

Branch: Hub and Spoke model with 55 branches by Year 10

Target Monthly Household Income range: Rs. 5,000 – 20,000

Both salaried customers who are unable to access home loans and informal sector customers, i.e. self-employed and salaried unorganized individuals

Customer Profile and

Focus

Product Offerings

and Pricing Structure

Primary Product: Loan for home purchase

Loan Amount: 2 – 8 Lakhs: Families earning between Rs. 5,000 and 20,000 can afford homes costing up to 40 times their monthly income, i.e. Rs. 3 – 10 Lakhs

Loan to Value: 50 – 80%: A minimum of 20% equity from the customer will help mitigate the financier’s risk, while ensuring that the loan is not sub-prime

Installment-Income Ratio (IIR): 30 - 40%: This income group typically pays between 20 - 25% of their monthly incomes as rent, so a 30 - 40% EMI is feasible

Loan Tenure: 6 – 15 years: Will vary based on the customer’s income

Pricing Structure

Adjustable Rate Mortgages with typical interest rates between 11 - 15% based on down-payment amount, IIRs, loan Tenure, and perceived risk profile of customer; and allowing approximately a 3-4% spread

Processing fee of 1% of loan value to re-cover loan origination and credit check costs

The business will primarily focus on the urban customer in the Income Group Rs. 5,000-20,000 who does not currently have access to a home loan


Portfolio Growth Projections over 10 yearsPortfolio Growth Projections over 10 years

A Low Income Housing Finance Business

Projected Revenue Potential for a Housing Finance Business

A housing finance business can achieve significant growth over a 10 year period, disbursing close to 260,000 loans worth ~ Rs. 10,000 Crores and turning profitable in year 3

37,50018,750

9,3753,7501,5005000

50,000

100,000

150,000

200,000

250,000

300,000

Y2Y1 Y10

258,398

Y9

172,266

Y8

114,844

Y7

65,625

Y6Y5Y4Y3

Cu

mu

lati

ve G

row

th in

Lo

ans

Cu

mu

lati

ve V

alu

e o

f L

oan

s D

isb

urs

ed

(Rs.

Co

res)

Assumptions1 Assumptions1

Since the HFC market is extremely underpenetrated – it is feasible to assume Year on Year growth rates between 50 – 200% for a start-up, decreasing yearly

Average Ticket Size is Rs. 4 Lakhs

Interest Rate: 14%; Gross Spread of 4%

Loan To Value: No more than 80%

Sanction and Disbursal: 12 month time lag between disbursement and commencement of principal repayment

Scheduled loan Tenure is 15 years

The average loan gets repaid in 8 years and there is no prepayment penalty

Since the HFC market is extremely underpenetrated – it is feasible to assume Year on Year growth rates between 50 – 200% for a start-up, decreasing yearly

Average Ticket Size is Rs. 4 Lakhs

Interest Rate: 14%; Gross Spread of 4%

Loan To Value: No more than 80%

Sanction and Disbursal: 12 month time lag between disbursement and commencement of principal repayment

Scheduled loan Tenure is 15 years

The average loan gets repaid in 8 years and there is no prepayment penalty

ObservationsObservations It is possible to model more aggressive or

conservative growth scenarios based on the capital available, high level strategic objectives (desired share of the market) of the promoters, supply of low income housing stock etc.

Cumulative Portfolio Size is dependent on Average Ticket Size of loan, with bigger loans resulting in a larger book size

It is possible to model more aggressive or conservative growth scenarios based on the capital available, high level strategic objectives (desired share of the market) of the promoters, supply of low income housing stock etc.

Cumulative Portfolio Size is dependent on Average Ticket Size of loan, with bigger loans resulting in a larger book size

Cumulative Number of Loans Disbursed

Note: 1 Assumptions are based on interviews with Dewan Housing Finance Company, MAS Rural Housing and Finance, MHFC, and Fullerton Capital

10,336

1,500750

37515060200

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

4,594

2,625

Y10

6,891

Y9Y8Y7Y6Y5Y4Y3Y2Y1

Cumulative Amount of Loans Disbursed (in Rs Crores)


Per Customer Cost AnalysisPer Customer Cost Analysis


Customer Level Economics: Revenue and Costs at Branch Level

The average cost to acquire a customer is Rs. 8,000 and cost to service their loan over the loan term is Rs. 20,000, while the net income earned per customer is Rs. 88,000

Co

st t

o S

erve

Per

Cu

sto

mer

(R

s.)

Inco

me

Ear

ned

Per

Cu

sto

mer

(R

s.)

Assumptions Assumptions

Average Loan Size: Rs. 4 Lakhs Interest Rate Charged: 14% Loan Processing Fee: 1% NPA: 1.0%1

A 0.5% of loan value bonus is provided to the branch sales force as an incentive fee for each loan generated

These assumptions are typical for most HFCs (our data is based on inputs from Dewan, GRUH, HDFC and MHFC)

Average Loan Size: Rs. 4 Lakhs Interest Rate Charged: 14% Loan Processing Fee: 1% NPA: 1.0%1

A 0.5% of loan value bonus is provided to the branch sales force as an incentive fee for each loan generated

These assumptions are typical for most HFCs (our data is based on inputs from Dewan, GRUH, HDFC and MHFC)

ObservationsObservations

It costs approximately Rs. 32,000 to serve each customer, i.e. cost to serve is about 8% of loan size,

The HFC would earn approximately Rs. 88,000 in net income from each customer

Net Profit Per Customer Over 8 years (not including other costs) is approximately Rs. 56,000

It costs approximately Rs. 32,000 to serve each customer, i.e. cost to serve is about 8% of loan size,

The HFC would earn approximately Rs. 88,000 in net income from each customer

Net Profit Per Customer Over 8 years (not including other costs) is approximately Rs. 56,000

Note: 1 DHFC and Gruh NPAs are less than 1%

32,00020,000

4,000

1,0002,0002,000

3,000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Sales Incentive

Office Overheads

Average NPA

Documentation, Storage & Retrieval

Legal & Technical clearance

Total Cost to Serve

Operating Overheads

88,0004,00084,000

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Processing FeeNet Interest Income Total

Per Customer Revenue AnalysisPer Customer Revenue Analysis


Profitability over a 10 year time periodProfitability over a 10 year time period


Profitability over a 10 year time frame

The HFC will turn profitable after 3 years of operations, and it is anticipated that margins will grow sequentially in progressive years

Net

Pro

fit/

(Lo

ss)

(Rs.

cro

res)

Per

cen

tag

e R

etu

rn

Note: 1 Based on conversations with HFC Industry Experts and existing HFCs

Assumptions1 Assumptions1

Average Loan Tenure: 8 years Cost of debt: 10% Debt Equity ratio:

Year 5- 4: 1 Year 10- 6: 1

Capex in Years 1 to 3- Rs 3 Cr (towards software and hardware)

NPA of 1 % provided on all loans disbursed from Year 4

Net Profit/Loss = Post Tax (Income – Expenses)

ROE = Net Profit/Loss / Average Equity

ROA = Net Profit/Loss / Average Assets

Average Loan Tenure: 8 years Cost of debt: 10% Debt Equity ratio:

Year 5- 4: 1 Year 10- 6: 1

Capex in Years 1 to 3- Rs 3 Cr (towards software and hardware)

NPA of 1 % provided on all loans disbursed from Year 4

Net Profit/Loss = Post Tax (Income – Expenses)

ROE = Net Profit/Loss / Average Equity

ROA = Net Profit/Loss / Average Assets

ObservationsObservations

The HFC will operate at a loss for the first few years, but will turn profitable by year 3

ROE of 23% in year 10 is very robust by the Indian financial industry standards

ROA of 3% in year 10 is comparable to HFC industry standards

The HFC will operate at a loss for the first few years, but will turn profitable by year 3

ROE of 23% in year 10 is very robust by the Indian financial industry standards

ROA of 3% in year 10 is comparable to HFC industry standards

276.9

52.627.3

16.05.60.8-1.2-2.8

-50

0

50

100

150

200

250

300

Y5Y3 Y4Y2Y1 Y7 Y8Y6 Y10

180.3

Y9

101.9

3.33.22.92.62.52.90.8

23.022.019.0

17.0

13.010.0

6.0

1.0

-13.0-15

-10

-5

0

5

10

15

20

25

Y5 Y6Y3 Y4

2.2

Y2 Y7

-4.0

-13.9

-3.0

Y1 Y10Y9Y8

Return On Equity

Return On Assets


Low Income Housing Finance

A Fundamentally Different Business Model

Income documents / tax papers generally

inadequate

Credit appraisal

SalariedBased on income

documents / tax formsDetermine eligibility

based on income proofGeneral credit

appraisalSanction

loan

Self employed / Professional

Use surrogates for

credit appraisal

Scope of Business:

Margins, Credit/Debit Terms, Stability

Savings Habit (e.g., from chit funds)

Track Record

Reference Checks,

Supplier/Customer Referrals

Gross Receipts

Personal Discussion

Background and Profile

Prior History and Relationship

Based on the parameters

sanction / reject loans

Like microfinance, low income housing finance is a fundamentally different business model than traditional housing finance, and requires completely distinct processes to appropriately assess customer credit worthiness and risk

SE

LF

EM

PL

OY

ED

SA

LA

RIE

D

Illustrative Credit Appraisal Process for Low Income Informal Sector Customers

•Credit appraisal to accurately understand element of risk within the informal sector requires proxiesfor traditional income documents

•Due to the lack of income proof and other verification, the informal sector requires a more ‘field-based’ approach to verifying income and credit worthiness including visits to the customer’s business, conversations with NGOs/

chit funds/local institutions the customer is linked to etc.

•Credit appraisal to accurately understand element of risk within the informal sector requires proxiesfor traditional income documents

•Due to the lack of income proof and other verification, the informal sector requires a more ‘field-based’ approach to verifying income and credit worthiness including visits to the customer’s business, conversations with NGOs/

chit funds/local institutions the customer is linked to etc.


Low Income Housing Finance: Potential Role of MFIs

Profile and InterestProfile and InterestProfile and InterestProfile and Interest Interests of select leading urban MFIs Interests of select leading urban MFIs Interests of select leading urban MFIs Interests of select leading urban MFIs

Most MFIs in India are largely active in rural areas

However, there are a few MFIs which cater mainly to the urban

poor e.g., Ujjivan, Swadhaar, SatinCare, etc

– Most have small loan portfolios and small customer bases

Provide short tenure loans (6 months-5 years) for house repairs,

livelihood generation and consumption etc.

Most MFIs do not have the necessary scale to undertake risk

sharing, although some are willing to undertake part risk if

provided with long term line of credit

Interested in providing support (for a fee) in demand aggregation,

credit evaluation, loan distribution and collection etc.

Some MFIs, not keen on risk sharing, are willing to align

incentives to provide additional comfort to FIs

– Incentives linked to collection in case of agency role (the

model has not been tried out hence MFIs have not through

about desired incentive structure)

Collection and Collection and DistributionDistribution

Collection and Collection and DistributionDistribution

Non Client Non Client Credit Risk Credit Risk

AssessmentAssessment

Non Client Non Client Credit Risk Credit Risk

AssessmentAssessment

Alignment of Alignment of IncentivesIncentives

Alignment of Alignment of IncentivesIncentives

Risk Sharing Risk Sharing on Housing on Housing

LoansLoans

Risk Sharing Risk Sharing on Housing on Housing

LoansLoans

Demand Demand AggregationAggregation

Demand Demand AggregationAggregation

Sharing Client Sharing Client Credit HistoryCredit HistorySharing Client Sharing Client Credit HistoryCredit History

1

Note: 1 Share MFI open to share client history, credit risk assessment or play an agency role in collection and distribution only if the activities are bundled with potential risk sharing role; 2 Willing for part risk sharing and need to discuss with banks to understand exact risk sharing mechanism

MFIs may be well placed to serve as conduits for housing finance or even set up dedicated HFCs because of their access and understanding of low income informal sector customers and the unique processes required to best serve them

2

1

1

2

Urban MFIs can either set up dedicated HFCs (such as MAS), or can assist traditional banks and HFCs interested In serving low income informal sector customers with customer pre-selection, credit appraisal, demand

aggregation, payment collections, risk assessment etc.

According to many MFIs, ‘the ultimate aspiration for their customers is to own their own homes, and all other loans are merely a band-aid for a housing loan.’

Urban MFIs can either set up dedicated HFCs (such as MAS), or can assist traditional banks and HFCs interested In serving low income informal sector customers with customer pre-selection, credit appraisal, demand

aggregation, payment collections, risk assessment etc.

According to many MFIs, ‘the ultimate aspiration for their customers is to own their own homes, and all other loans are merely a band-aid for a housing loan.’


Note: 1 Monthly Household Income; 2 Affordability defined as households which have EMI / MHI Ratio of 40% of a Home loan which has a 20% down payment on an Home value, EMI level of Rs 1,200 per Lac (at 12% interest for a 15 year loan); 3 Conservative estimates that 60% of total households in MHI of Rs 5-20K (36Mn) are renting and looking to buy a house of their own. Source: NHB Trends in Housing; CRIS Infac Report; Monitor Research

Price of unit2 > Rs 25 Lacs Potential demand from ~2 M HHs with

estimated Market Size of ~Rs 500,000 Cr

Various mortgage finance options available for segment

Low Income Housing: The Economic Potential

The low-income housing segment (MHI of Rs 5,000 – 20,000) is estimated at 22 Million households with an estimated opportunity size of Rs. 1,100,000 Cr and is largely underserved

Urban Income Pyramid Offering & Supply of Housing

Price of unit: Rs 10–25 Lacs Potential demand from ~5 M HHs with

estimated Market Size of ~Rs 900,000 Cr

Mortgage finance available broadly

1%(0.7MM)

5%(3.4MM)

22%(15.0MM)

33%(22.4MM)

4%(2.7MM)

10000–20000

>80000

30000–40000

<5000

40000–80000

31%(21.1MM)

5%(3.4MM)

5000–10000

20000–30000

MHI1

(Rs)

Price of House: Rs 3–10 Lakhs Potential demand from ~ 22 Mn3 HHs

with estimated Market Size ~Rs 1,100,000 Cr

Supply of Housing Finance

Various mortgage finance options available for segment

Potential size of mortgage market ~ Rs 400,000 Cr

Mortgage finance available broadly Potential size of mortgage market ~ Rs

675,000 Cr

Severely constrained supply of housing finance for informal sector

Finance available for MHI > Rs 12K in the formal sector, limited availability below MHI of Rs 12K for formal sector and 20K for informal sector

Potential size of mortgage market ~ Rs 8,80,000 Cr


Affordable HousingAffordable Housing

Low Income Housing as a Driver for Economic Growth:

Wide Range of Benefits

Affordable housing can provide huge benefits to families, communities and aid overall economic development of state

Aiding Overall Economic Development Construction of low income housing provides

disproportionate job creation Creates significant economic value for state

(taxes, ancillary economic activity, source of labor potentially leading to industry, etc

Provide alternative to Urban Slums ~40M people live in urban slums without basic

facilities such as sanitation, water, schools, etc Renters disempowered. All power is w/ slum lords Slum lords “own” houses and benefit from Slum

Rehabilitation Schemes Slums create high pressure on infrastructure

within a city

Benefits for families of Urban Poor Housing is essential for the well-being of a

family Enhanced security and health through

organized housing with access to sanitation Access to better services (schools,

healthcare etc.) which are typically available to higher-income groups

Creation of Low-Risk Asset for Families Long term wealth creation due to value of

asset, “saving on rent” & collateral for loan A “security net” in crisis Low income houses typically built on land with

low cost per sq. ft. Low likelihood of price depreciation, Hence downside risk is low

Benefits to Communities Neighborhoods with good quality housing

have lower crime rates, stronger local economies and a better overall quality of life


Panel Discussion On:

Customer Demand and Need for Housing Finance

Traditional perspective on Risks and Costs to Serve

Lower Income Segments

Addressing Concerns on Serving this Segment

Funding and Investor Interest

For more information on the housing finance opportunity, contact:Ashish ([email protected]), Bala ([email protected]), or Nabomita ([email protected])

For more information on the housing finance opportunity, contact:Ashish ([email protected]), Bala ([email protected]), or Nabomita ([email protected])


Appendix


Context

Housing Finance Market: Map of Existing Players

There are 45 registered HFCs in India, and these are split almost evenly between organizations that can accept deposits from the public and those that cannot

• Haware’s Housing Development Finance Corporation

• India Home Loans Limited

• Mahindra Rural Housing Finance

• Micro Housing Finance Corporation

• Swagat Housing Finance Company

• Reliance Home Finance

• India Infoline Housing Finance

• Tata Capital Housing Finance

• Can Fin Homes

• DHFL Vyasa Housing Finance

• Manipal Housing Finance Syndicate

Cent Bank Home Finance

• GIC Housing Finance

• HDFC

• ICICI Home Finance

• Dewan Housing Finance Corporation

• LIC Housing Finance

• AIG Home Finance India

GRUH Finance

• Sundaram BNP Paribas Home Finance

• REPCO Home Finance

• Ind Bank Housing

• National Trust Housing Finance

• Vishwakriya Housing Finance

• HUDCO

• IDBI Home Finance

• PNB Housing Finance

• Deutsche Postbank Housing FinanceMAS Rural Housing

and Mortgage Finance

• HBN Housing Finance

• Indiabulls Housing Finance

• GE Money Housing Finance

• Maharishi Housing Development Finance Corporation

• Swarna Pragati Housing Micro Finance Private Ltd.

• Inara Housing Finance

• Janhavi Home Development and Finance

Kerala Housing Finance

Orange City Housing Finance

• Rose Valley Housing Development Finance Corporation

• Sahara Housingfina Corporation

Satyaprakash Housing Finance India

• SRG Housing Finance

• Akme Buildhome Private Ltd.

Utkal Housing Finance

Vastu Housing Finance Corporation

HFCs that cannot accept Deposits

HFCs that can accept Deposits

Source: NHB

Confidential

Copyright © 2008 Monitor Company Group, L.P. — ConfidentialSFS-HMM-VBHL 2nd Review Blank Loop_v8-081022-SA 21

Low Income Segments as Target Market: Largely-Untested Risk

Profile, different from Sub-prime in the USA

75-80% LTV – significant individual contribution required; EMIs tend to be 35% of Monthly Income

Target customers have regular employment, albeit with low income – with an unproven credit record which needs to be tested

In the low income segment, relatively low cost of land (esp. in peri-urban areas) leads to high correlation between cost of asset and replacement cost; and hence lower risk of asset bubbles

75-80% LTV – significant individual contribution required; EMIs tend to be 35% of Monthly Income

Target customers have regular employment, albeit with low income – with an unproven credit record which needs to be tested

In the low income segment, relatively low cost of land (esp. in peri-urban areas) leads to high correlation between cost of asset and replacement cost; and hence lower risk of asset bubbles

Low-Income Housing in IndiaLow-Income Housing in India

Outcome: Untested, relatively low risk segment with significant business potential

Very high LTV; creative structures developed to reduce EMIs

Loans extended without due consideration to ability to pay (basis employment history) – financing provided to those with questionable employment record

Cost of asset disproportionately high compared to replacement cost; this is attributed to the real estate asset bubble in the US – hence high risk of payment default

Very high LTV; creative structures developed to reduce EMIs

Loans extended without due consideration to ability to pay (basis employment history) – financing provided to those with questionable employment record

Cost of asset disproportionately high compared to replacement cost; this is attributed to the real estate asset bubble in the US – hence high risk of payment default

Sub-prime Experience in USASub-prime Experience in USA

Outcome: Sub-prime Defaults and Foreclosures

Confidential

Copyright © 2008 Monitor Company Group, L.P. — ConfidentialSFS-HMM-VBHL 2nd Review Blank Loop_v8-081022-SA 22

Establishing a Housing Finance Company: Monitor Inclusive

Markets’ Role

Introduce the concept of housing finance and disseminate information on the commercially viable business opportunity to provide housing finance to low income customers to broad groups of stakeholders

Actively assist new players interested in entering the HFC space with their market entry strategies and business plans

Disseminate Disseminate Concept & Help New Concept & Help New

Players Adopt the Players Adopt the Business ModelBusiness Model

Disseminate Disseminate Concept & Help New Concept & Help New

Players Adopt the Players Adopt the Business ModelBusiness Model

Monitor is well positioned to help incubate new Housing Finance Companies focusing on the low income sector, through its knowledge of the low income space in India as well as its deep networks

Assist in preparation of Information Memorandums for HFCs looking to raise funds

Connect HFCs to Private Equity investors looking to invest in the low income housing finance ecosystem

Actively assist in the fundraising process through broader introductions and brokerage with sources of capital such as multilateral institutions, foundations, impact investing networks etc.

Facilitate Access to Facilitate Access to CapitalCapital

Facilitate Access to Facilitate Access to CapitalCapital

Assist entrepreneurs through our knowledge of the process of setting up an HFC and introductions to experts and prior successful applicants

Connect the HFC to lawyers and technical experts with deep expertise in housing finance

Introduce the HFC to Monitor’s vast networks of developer partners, and facilitate tie-ups between the HFC and specific low income housing projects

Link HFC to key Link HFC to key players in the Low players in the Low Income Housing Income Housing

Ecosystem through Ecosystem through Monitor’s networksMonitor’s networks

Link HFC to key Link HFC to key players in the Low players in the Low Income Housing Income Housing

Ecosystem through Ecosystem through Monitor’s networksMonitor’s networks

Ashish Karamchandani

Documents

Transcript of Ashish Karamchandani