Microfinance Driven Emerging Business Models for Low Income Housing In India

A cursory look at the housing finance statistics underlines the compelling need for urban low income housing in India and explains the emergence of microfinance based new business models in this sector...despite liberal credit regime and the associated average 35%+ rate of urban housing finance growth in last decade, about 21 million (2.1 Crore) urban Indian population still can't afford to own a house..the reason..not so diifcult to comprehend...over 80% of urban housholds in India earn less than 220USD a month (@11,000INR at current conversion rate)...a houshold earning INR 11000 can only qualify for INR 4,50,000 worth of loan as per the housing finance guidelines (individual is entitled to home loan upto max 40 times his/her monthly income)...with INR 4,50000, one can hardly dream of owning a decent home in any tier I/II cities in India..clearly, there is an untapped customer base of @2 crore urbanites willing to buy a property in Indian cities....from the supply side, the housing finance companies have 2 major issues to deal with, before they open up the credit line to these potential buyers-1) high cost-to-serve ratio and 2) potential credit risk associated with perceived higher levels of defaults in this segment....

Demand slowdown in high income housing segment in last 2 quarters of 2008-09, , has compelled the housing finance and the realty developer companies to think in terms of innovative business models, which would help extend the credit line to these low income urbanites and at the same time address finance companys' concerns regarding issues such as high cost-to-serve ratio and defaults on repayments...The emerging business model is based on intermediary role of Self Help Groups (SHG-Bachat Gat), Mutually Aided Co-Op Societies(MACS/Daily Collections) as well as internal or external Micro Finance Companies (MFI) to bear the risk to recovery and also reduce high cost to serve ratio..MFIs are assumed to be performing the job of customer aggregation, first level screening and the critical debt recovery.. thus making this model sustainable...another supply side parameter impending this business model could be high land cost in urban areas...however thanks to demand slowdown in realty sector and the indications on part of Government to look at FSI relatd policy changes, land prices have seen some correction to the tune of @20-30% in most urban centres providing much needed impetus to low income housing in india...