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Michael Porter,
Harvard Business School
Director and Co-Founder of
the Monitor Group
Governments
City Strategies
Cluster Development
Country
Competitiveness
Non Profits
Social Venture Funds
Impact Investing
Education Ecosystem
Context
Low Income Housing: The Landscape
Urban India has a vibrant housing market and housing finance has grown at a CAGR of over 35%
for the past 13 years1. However, the supply of housing stock is concentrated on the upper income
groups the low income segments are largely un-served
Urban India Expenditure Pyramid2
Income
MHE:
>Rs 9,625 pm
MHE:
Rs 4,575
Rs 9,625 pm
MHE:
Rs 2,500
Rs 4,575 pm
16%
(10MM)
37%
(~23MM)
Rs. 11,000
US $ 220
Rs. 5,000
US $ 100
33%
(~21MM)
Rs. 2,500
MHE:
<Rs 2,500 pm
14%
(~9MM)
Less than top 16% of Urban Indian households can afford to own houses
Property rates across various cities suggest that it should be commercially viable to build affordable housing in the suburbs
for low income customers in urban India
1
Context
Low Income Housing: Social Need and Willingness to Pay
Detailed customer research and our interaction with over 2,000 customers on the ground showed
high need for a house of their own among people living in appalling living conditions
Profile - Nathubhai
Has steady job as a
factory worker in a
textile enterprise in
Ahmedabad
Monthly HH income ~
Rs 8000, savings up to
Rs 900 - 1000 p.m.
Lives in 1RmK in low
income neighborhood,
Rent Rs 1800
Family size 5 with mother, wife and
2 children
Assets Bank Account (ICICI), Life
Insurance (Rs 3L), TV set
Education
Both children attend private
Gujarati medium schools
Rent
Increased by 50% in past 3 years
and moved every 2 to 3 years
Appalling conditions
of Slum-Dwellers
Live in poorly
constructed
small cramped
houses
Poor sanitary
conditions
shared toilets,
bad drainage,
water logging
during
monsoons
Lack of facilities
properly
planned access
points,
walkways,
gardens,
dedicated
schools etc.
Profile - Ganesh
Context
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
MHI1
(Rs)
1%
(0.7MM)
>80000
4000080000
5%
(3.4MM)
3000040000
4%
(2.7MM)
5%
(3.4MM)
2000030000
1000020000
22%
(15.0MM)
500010000
31%
(21.1MM)
<5000
33%
(22.4MM)
Mn3
HHs
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
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 credibility
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
Ahmedabad: Vatva
Taral Bakeri
Phase 1: 800 units
Price: Rs 3.3 Lakh 5.6 Lakh
Maharashtra: Boisar
Tata Housing
67 acres: Phase 1: 1200 units for LIH
1-RMK and 1BHK
Rs 3.9 Lakh and Rs 6.7 Lakh
Bangalore: Atibele
Janadhar
11 acres: 1500 units
1BHK and 2 BHK; Rs 4 Lakh and 6 Lakh
Ahmedabad: Vatva
Foliage Developers
Phase 1: 400 units
Price: Rs 2.81 lakh upwards
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
Bangalore: Value Budget Housing
Development Corporation
Rs 3-9 Lakh townships on minimum
10 acre plots; 1 Million intended flats
Encouraging Developers
Dissemination
10
Context
A Stand -Alone Low Income Housing Business: Outline
The business will primarily focus on the urban customer in the Income Group Rs 5-15K who
does not have to access to a home loan facility
Customer
Profile and
Focus
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
Both salaried customers who are unable to access home loans and informal sector customers, i.e.
self-employed and salaried unorganized individuals
Product
Offerings and
Pricing
Structure
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
financiers 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
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
11
Economic Potential
Revenue Potential for a Low Income HFC
It is estimated that at the HFC will achieve significant growth over 10 years disbursing close to
2,60,000 loans worth ~ Rs. 10,000 Crores
Assumptions1
300,000
250,000
258,398
200,000
172,266
150,000
114,844
100,000
65,625
37,500
50,000
500 1,500
3,750
9,375
Y3
Y4
18,750
Y2
Y5
Y6
Y7
Y8
Y9
11,000
Y10
10,336
10,000
9,000
Observations
8,000
(Rs. Cores)
Y1
6,891
7,000
6,000
4,594
5,000
4,000
2,625
3,000
1,500
2,000
1,000
20
60
150
375
Y2
Y3
Y4
750
Y1
Y5
Y6
Y7
Y8
Y9
Y10
Note: 1 Assumptions are based on interviews with Dewan Housing Finance Company, MAS Rural Housing and Finance, MHFC, and Fullerton Capital
12
Economic Potential
Customer Level Economics- Revenue and Costs at Branch Level
The average cost to acquire a customer is Rs. 8,000 and the cost to service their loan over their
repayment period is Rs. 20,000, while the net income earned per customer is Rs. 88,000
Per Customer Cost Analysis
Cost to Serve Per Customer (Rs.)
35,000
Assumptions
20,000
32,000
30,000
25,000
20,000
15,000
4,000
10,000
2,000
NPA: 1.0%1
1,000
2,000
5,000
3,000
Legal &
Sales
Office Documentation,Average Operating Total Cost
Technical Incentive Overheads Storage &
NPA
Overheads to Serve
clearance
Retrieval
84,000
4,000
88,000
80,000
70,000
Observations
60,000
50,000
40,000
30,000
20,000
10,000
0
Net Interest Income
Processing Fee
Total
13
Economic Potential
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
Assumptions1
276.9
250
180.3
200
150
101.9
100
52.6
50
-2.8
-1.2
0.8
5.6
16.0
Year 5-
4: 1
Year 10-
6: 1
27.3
-50
Y1
Y2
Y3
Y4
Y5
Y6
Y7
Y8
25
22.0
Return On Assets
20
Percentage Return
Y9
17.0
Return On Equity
Y10
23.0
19.0
Observations
13.0
15
10.0
10
5
0.8
-15
2.2
2.9
2.5
2.6
2.9
3.2
Y4
Y5
Y6
Y7
Y8
Y9
3.3
-3.0
-4.0
-5
-10
6.0
1.0
-13.9
-13.0
Y1
Y2
Y3
Note: 1 Based on conversations with HFC Industry Experts and existing HFCs
14
Y10
Affordable Housing
Benefits to Communities
15
THANK YOU !
16
Backup
17
Large private
Banks, HFCs
10 Lakhs
5 Lakhs
increase profitability
Largely Un-served
2 Lakhs
Some PSU schemes, but difficult to access loans due to bureaucracy; staff incentives
geared towards disbursement targets
Informal
Paid / earns in cash
No formal income documents
No formal residence/identity
documents
Semi-formal
Salaried or Self Employed
Significant proportion of
undisclosed income
Some residence/identity
documents
Formal
Salaried with pay slip
Income Tax documents
Residence Documents
Identity documents
Bank account
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
GRUH Finance
Source: NHB
19
Context
Barriers to entry for Housing Finance Companies
Housing Finance Companies are reluctant to serve customers in the informal sector because of the
uncertainty of their risk profiles
Ticket Size
Large private
Banks, HFCs
10 Lakhs
5 Lakhs
Largely Unserved
Some PSU schemes, but difficult to access
loans due to bureaucracy; staff incentives
geared towards disbursement targets
Semi-formal
Informal
Paid / earns in cash
No formal income documents
No formal residence/identity
documents
Formal
Salaried with pay slip
Income Tax documents
Residence Documents
Identity documents
Bank account
20
Confidential
21
Confidential
Understanding the
risk profile of the
informal
sector
Cash
micropayments
Managing
Construction Risk
(Developer Tie-Ups)
Source:
Monitor Analysis
SFS-HMM-VBHL 2nd Review Blank Loop_v8-081022-SA
Unconventional methods are required to measure the credit risk associated with low income
informal groups, in the absence of formal documentation
Alternate methods of income verification income such as understanding the customers savings
history (chit funds, MFIs), business (access to credit from suppliers, line of credit to customers,
daily cash flows etc.) are required
Collecting a large number of small payments that originate from the customer as cash is difficult
and expensive
Most HFCs use a post-dated cheque or ECS system, but this requires that the customer have a
pre-existing bank account
As low cost housing finance is mostly driven by access to supply of appropriate homes,
performing adequate due diligence on developer partners is paramount
22
Confidential
Access to sources of long term, low cost funding (ideally below market rates) to enable HFCs to
keep consumer interest rates low
Expediting NHB timelines for granting HFCs approvals and improved transparency into the
process would enable rapid and efficient market entry for new players.
Creating a guarantee fund that could take the first X% of losses against lending to low income
groups would encourage new players to enter the market
This would allow these players to build a better understanding of risk in the segment and in turn
appropriately price risk into their mortgage products.
Process and
Technology
Innovations
Source:
Monitor Analysis
SFS-HMM-VBHL 2nd Review Blank Loop_v8-081022-SA
Allow daily cash collections of EMIs through network of collection agents/MFIs or at the branch
Introduce a seasonal loan products that enables customers to tune their repayment cycle to their
seasonal income cycles
Linkages between customers savings accounts and repayment schedules to enable direct
deposits of EMIs etc
Mobile banking facilities to enable prompt repayments from customers lacking bank accounts
Use MFIs extensive knowledge of the target customer base to select customers with strong
repayment history and lower perceived risk
Employ MFIs extensive staff of Field Officers for loan collection and disbursals of loans
Encourage the government to make it easier for MFIs to set up HFC divisions
23
Confidential
Disseminate
Concept & Help New
Players Adopt the
Business Model
Facilitate Access to
Capital
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
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.
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 Monitors vast networks of developer partners, and facilitate tie-ups
between the HFC and specific low income housing projects
24