Housing Finance for urban financially excluded families (typically lower income and from the informal sector)
The informal sector, estimated at 90% of the working population, cannot access finance from banks due to a lack of documentation (IT returns, salary certificates, etc) due to which they cannot prove incomes. Many earn a decent income and can afford a housing loan of upto Rs 5-6 lakhs but since financially excluded, have to continue to stay (and mostly rent) in slums where the conditions are terrible. MHFC is the first housing finance company in India solely focussed on this segment and takes a microfinance style approach - of getting to know the customers closely - and through a combination of personal interviews and verifications, and income bechmarking surveys, is able to assess incomes of customers like taxi drivers, maids, vendors, carpenters, mechanics, plumbers, tradesmen, etc.
About You
About You
First Name
Rajnish
Last Name
Dhall
About Your Organization
Organization Name
Micro Housing Finance Corporation ("MHFC")
Organization Website
Organization Phone
+912222660130
Organization Address
3, Victoria Building, S A Brelvi Road, off Horniman Circle, Fort, Mumbai - 400001
Organization Country
India, MM
Country where this project is creating social impact
India, MM
Is your organization a
For‐profit
How long has your organization been operating?
1‐5 years
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Innovation
Entry Form title
Housing Finance for urban financially excluded families (typically lower income and from the informal sector)
Describe your project
The informal sector, estimated at 90% of the working population, cannot access finance from banks due to a lack of documentation (IT returns, salary certificates, etc) due to which they cannot prove incomes. Many earn a decent income and can afford a housing loan of upto Rs 5-6 lakhs but since financially excluded, have to continue to stay (and mostly rent) in slums where the conditions are terrible. MHFC is the first housing finance company in India solely focussed on this segment and takes a microfinance style approach - of getting to know the customers closely - and through a combination of personal interviews and verifications, and income bechmarking surveys, is able to assess incomes of customers like taxi drivers, maids, vendors, carpenters, mechanics, plumbers, tradesmen, etc.
What stage is your project in?
Operating for 1‐5 years
What makes your project unique as it relates to the theme of this competition?
MHFC is the first and currently only organisation which is focussed on helping urban lower income families (esp those who lack documentation) own a home by helping with financing. It is a completely unique model and completely necessary if the eco system of lower income housing needs to be built (latest govt of India figures peg the shortfall at 25 Million homes and this is deemed to be understated heavily). There is no denying the massive demand but developers state that even if they came forward and built for lower income families - in the price range of less than 10 lakhs, lower income families do not get financing. As a result, developers will not even build unless they believe that aspiration to own a home is backed by real purchasing power. Hence, for the eco system (of providing affordable housing for urban lower income families) to be built, financing is a crucial part of the equation. Unfortunately, as on date, families are excluded because they lack documentation - and in India, almost 90% of the workforce is from the informal sector and lacks paperwork. Thus, an organisation like MHFC (and many more such MHFCs) is imperative to try and help solve the housing problem. Regarding the theme, in order for housing for lower income urban families to be sustainable, we believe it must be a market based solution and this is not possible unless there is financing the same way that there is financing for urban middle and upper income families.
Share the story of the founder and what inspired the founder to start this project
The housing problem is easily visible in a city like Mumbai - over 60% of the 20 Million population live in slums in very poor living conditions. This is despite the fact that many dwellers pay rents which could be used to buy one's own home. But homes are not being built because builders do not believe (and they are right in this) that this segment will get housing loans. This is what MHFC would like to change. The company was founded because the driver of one of the founders asked for a housing loan - which he could easily service and pay over 7 years - but no mainstream bank would be willing to support. It made us realise that there is a large market firstly but more than that this is a social issue (lack of housing) that could be solved (at least partially) if there were financiers for this segment of the population.
Social Impact
This Entry is about (Issues)
Who or what (i.e. youth, women, environment, etc.) benefits from your project, and why is your project critical?
Our customers currently live in slums (generally in a 150 sq ft room) in very poor living conditions (lack of sanitation / water / electricity / light etc). Generally, they also pay a high cost - rents are going up almost every year - and also there is an inconvenience factor of having to move every 11 months (as the landlord is wary of tenancy rights). We are giving an opportunity - through financial inclusion - of home ownership (generally about 350 sq ft flats which have clear title and decent quality with access to municipal sanitation / water / electricity). This is a massive instrument of change - both in terms of improvement in quality of life and also in terms of savings (to own an asset over say 15 years and which generally increases tremendously in value).
Please describe how your project has been successful and how that success is measured.
About 400 families have already been given loans and have moved into / will be moving into homes which are very similar to that of middle income home quality - only difference being a smaller size home - of say 350 sq ft - but this is still bigger than current home size in the slums (about 150 to 200 sq ft). Furthermore, what is inspiring is that all our loans (approx Rs 15 crores or $ 3 MM) are being repaid on time - we have no past dues. As a result, MHFC is all set to scale and we expect to sanction loans (aggregating $ 12 MM or Rs 60 cr) to 1500 families by the end of FYE 3/2011 - and within 5 years, we expect to reach at least 50,000 families - and sanction an amount of $ 400 MM or Rs 2000 cr. This is still only scratching the surface of the problem but at least its a start and if we are succcessful, we expect several more MHFCs catering to urban lower income families to come up, and provide the eco system a bigger fillip. There is no reason why there cannot be a construction industry built on sustainable grounds aimed at lower income families - just like it has been succcessful for middle and upper income families.
How many people have been impacted by your project?
1,001 - 10,000
How many people could be impacted by your project in the next three years?
More than 10,000
What barriers might hinder the success of your project and how do you plan to overcome them?
We have strong govt and regulatory support. But we need builders - as till date there has been no construction aimed at lower income families - there is huge unmet demand in middle and upper income segments and builders have also felt (correctly) that there is a financing problem for lower income families. MHFC spends a lot of time stimulating builders with the thought that this segment is fairly recession proof as there is unmet demand of over 20 Million families - and now MHFC is also there to support the financing requirements. But yes, there are barriers for the builders - in that land is not cheap and so they would rather use the land to build more expensive properties. The govt must step in and help incentivise the builders to build more for the poor.
How will your project evolve over the next three years?
As stated above, MHFC expects to sanction loans (aggregating $ 12 MM or Rs 60 cr) to 1500 families by the end of FYE 3/2011 - and within 3 years, we expect to reach at least 10,000 families - and sanction an amount of $ 80 MM or Rs 400 cr. We expect to be in at least 10 to 12 Indian cities - curently we are in Mumbai, Pune, Ahmedabad and Kolkatta.
Sustainability
For each selection, please explain the financial and non-financial support from each
Current equity base approx $ 6 MM - of which about $ 1 MM from friends and family and $ 5 MM approx from the Michael and Susan Dell Foundation and the India Financial Inclusion Fund.
How do you plan to grow and/or diversify your base of support in the next three years?
We are a for profit and expect to grow in a sustainable manner. If there is reasonable proof of concept, we expect to be able to raise commercial debt and also equity from commercial investors.
We also expect to have several partnerships with NGOs / MFIs / institutions that have employees in our customer base (like taxi companies / cable TV companies) - so that we can bridge the information gap and spread awareness on projects and financing that is available.
Collaboration
Please select your areas of intervention in the home improvement market
Financing, Property rights.
Is your innovation addressing barriers in the home improvement/progressive housing market? If so, please describe in detail your mechanisms of intervention
Not really - we are focussed on helping individuals buy their first home - for use as primary residence.
Are you currently collaborating with private companies, or have you partnered with private companies in the past? With which companies?
Yes - we work with developers like Tata Housing / Poddar Housing - for a full list of our builder partners, see link
http://www.mhfcindia.com/approved-project.html
Please describe in detail the nature of the partnership(s)
We encourage builders to aim their projects at lower income families and assure them that the aspiration will be converted to real demand with our financing. We think that we are valuable partners for builders in that we are adding to their potential demand by focussing on a completely excluded segment.
Select the unit(s) with which the partnership was formed
Marketing department, Sales department.
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Comments
Dear Rajnish,
This is a great initiative!
My question is, if each family has to be looked into personally before approving a loan, how time consuming does it become, and would you require more staff than other creditors to achieve this?
Thanks!
Hi Rachna
firstly thanks for going through our entry in detail - and your very kind comment.
yes, its probably more time consuming in that we spend time with each applicant at their workplace typically to (a) understand their business and (b) understand their motivation in owning a home (since we basically fund real users and not investors).
but we think that this is necessary in any business - understanding one's customer thoroughly - so it may be slower but we firmly believe that it is imperative.
having said that, it takes about a day for our Loan Officer ("LO") to study the customer's case and write a "storyboard" based on his / her analysis - and thus, the LO could probably submit 5 cases a week or 20 cases max a month or to round off, maybe 200 cases a year.
with that logic, for MHFC to achieve our first year's target of 1500 loans - we would need say 10 LOs max and likewise, for a 2nd year's target of say 3000 loans, we need about 15 to 20 LOs and in the 3rd year maybe about 30 to 40 LOs to achieve about 6000 loans. I believe its not that many - and maybe its more than what other banks might have for the same number of loans - but to ensure that we know our customers well - and to keep a good relationship going, I think its worth having the 50 to 75 Loan Officers needed to source and maintain (and also engage in customer education) say 10,000 loans - which is not a small number - and is our 3 years target.
hope that helps - please let me know if you have any other queries - thanks again for your interest.
Rajnish
Dear Rajnish. How do you plan to low the financing interest rates. The formula that we finally reached is that the financial factor, in the sustainable social housing production has to be like any other construction material, like cement, iron or water tank. Best quality at the lower price. This means that money cost has to be covered but non-profit. In this way we create a blue ocean. If we try to compete with microcredit we´ll end in a red ocean.
Hi Francesco - thanks v much for your interest and question. I completely agree with you that interest like any other material should be competitive to make the eco system sustainable. To specifically answer your question, actually our interest rates are not that much off the mark - as in, normal mortgage rates in India (for the financially included - generally upper and middle income groups) are about 10% to 11% (floating of course - and for 15 year tenors) - we are at about 12% to 14% - so about 2% to 3% higher. We would like to bring this down of course but given MHFC is fairly new (just over a year in operation), our funding costs cannot be compared right now to established housing finance companies (our borrowing cost closer to 10% compared to about 7% for the mainstream financial entities). We believe that our rates would get more competitive over the years and we hope will be in line with loans made to higher income borrowers. But even at this stage, we believe that its within the ballpark.
Mister Rajnish Dhall, congratulations for your design, my name is Andres Vera for the colombian newspaper El Tiempo, please i want know more about your design and why you participate in this competition, 'Global Online', you can send me an e-mail to jorver@eltiempo.com.co or javeram8@hotmail.com, thank you for your time
Your idea is timely and innovative; rural to urban migration has created substantial pressure on urban centers, as a result more and more people are pushed to the slums; poverty and sub-human conditions of living create other social problems; easy ownership options through affordable housing credit is a viable solution to an emerging problem.
We will be grateful if you would kindly throw some light on the range of loan amounts and the repayment periods to understand aspects of affordability.
Thanks Siddharth for taking the time to read through our idea, and for your comments. Yes, urban housing is absolutely imperative and while getting developers to build for this segment is critical, making financing available is equally important. Our whole premise is that even if developers did come forward and built price wise affordable homes, informal sector workers (who do not have documentation) would still be not in a position to buy as they would need long term financial assistance (just like most home buyers).
Re our terms of financing, actually it is not very different from any other mainstream housing company - in that we lend to individuals (max 80% of the purchase price) to buy a primary residence over which we take a formal charge. In India, most housing finance companies lend for upto 15 years and so do we. The difference is that MHFC lends to a segment that other banks will not lend to - and yes, our loan amounts are much smaller - our average loan size is just short of $10,000 - which is in line with the needs of the segment we are dealing with (though we are prepared to go up to $20,000 per our mandated mission). Most mainstream financiers would not touch such "small ticket" loans in any case.
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