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Catalyzing the market for informal sector micromortgages (targeting SME households)
Localização
The ownership of a house is important collateral for an informal sector entrepreneur, who can leverage funds for her business from mainstream financial institutions with this asset. MIM believes there exists an innovative and commercially viable business model for micromortgages and is currently engaged with several potential players to catalyze interest and investment in this market.
Sobre Você
Sobre Você
Nome
Nishant
Sobrenome
Lalwani
Your Organization
Monitor Inclusive Markets
Country
Índia, MM
Sobre Sua Organização
Nome da Organização
Monitor Inclusive Markets
Página da organização na internet
Telefone da organização
+ 91 22 6658 2000
Endereço da organização
131 Free Press House, Nariman Point, Mumbai 400 021
País da organização
Índia, MM
Organization Type
Private Institution
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Your solution
Name Your solution
Catalyzing the market for informal sector micromortgages (targeting SME households)
Describe Your Solution
The ownership of a house is important collateral for an informal sector entrepreneur, who can leverage funds for her business from mainstream financial institutions with this asset. MIM believes there exists an innovative and commercially viable business model for micromortgages and is currently engaged with several potential players to catalyze interest and investment in this market.
Country your work focuses on
Índia, MM
If multiple countries, please list them here. If your solution targets an entire region, please select it below
Region(s) your solution focuses on:
South Asia.
Range of turnover in your target firms, in USD
Less than $1 Million.
Average turnover in USD of your target firm
4000
Number of employees in your target firms
Fewer than 5.
Average number of employees of your target firm
3
Specify the size, average and range of expected loans or investments in each target firm
The typical range of loan amounts in micromortgages is from $6,000 to $25,000 per borrower.
What stage is your solution in?
Em execução entre 1 e 5 anos
INOVAÇÃO
What makes your innovative solution unique?
The informal sector – defined here as those households with a monthly household income of $150 to $500 but with no formal income documentation – has been left largely unserved by housing finance companies, as it was deemed high risk and too expensive to serve. These potential home owners typically run small businesses such as grocery stores, tailoring units and auto workshops and fall into the SME category, where the household and business assets of the entrepreneur are fungible for the purposes of collateral. MIM’s vision of a mature and deep market for micromortgages would help these SME entrepreneurs access funding for the creation of an asset, which could be leveraged for additional cash flow when required in the business.
The creation of a tangible, immovable asset in the name of the entrepreneur also dramatically improves her creditworthiness and credibility, making her “bankable” in the eyes of mainstream financial institutions, where the availability of personal collateral and prior credit history are both important reference points in evaluating a potential customer. Further, micromortgages help meet the objectives of greater financial inclusion and therefore financial literacy of this customer group, many of whom have never been part of a formal banking system or encouraged to follow prudent financial goals. For example, in the case of Micro Housing Finance Corporation (MHFC) – India’s first start-up in micromortgages and one of MIM’s early partners – every approved loan customer is required to open a bank account for her EMI payments, and relationship managers counsel borrowers on cash flow based accounting to manage their monthly finances. Finally, investing in quality housing results in indirect benefits to the SME entrepreneur with better sanitation, water and healthcare, and therefore improved standards of living.
How does your proposed innovation leverage public intervention in catalyzing private SME finance?
MIM’s work in micromortgages is inspired by its success in making the market for urban low income housing in India, where a market-based solution has been established as not only a commercially viable proposition but also one that creates significant social impact at scale. In a notable change to the scenario in 2006 when MIM began its work in urban low income housing, there are over 25 developers across seven states in India today offering apartments in the $6,000 to $25,000 range, the cheapest of which is affordable to households with a monthly income of as little as $150.
The continued growth of low income housing is however critically dependent on the availability of affordable housing finance to this target customer group. Catalyzing the market for micromortgages therefore assumes particular significance. The creation of a vibrant micromortgages market requires first an understanding by interested players of the commercial opportunity and the positive social impact, and second meaningful dialogue among all stakeholders. MIM sees its role as a facilitator for both. MIM has been engaged with an “interested” group of players – for example, those that have existing expertise in housing finance albeit with a different customer focus, ones in allied businesses such as vehicle, personal and gold loans and MFIs – to introduce the micromortgages opportunity and model to them. MIM then works with these companies to develop their business blueprint for micromortgages and also assists with a range of related services including applying for regulatory licenses and hiring for critical senior management posts for the proposed micromortgages venture. MIM is particularly proud of the fact that two such engagements with partners have resulted in their commencing operations. Apart from playing the role of the market maker, MIM is also in constant touch with the regulators at the National Housing Bank – the apex regulatory body for housing finance companies in India – and provides inputs on policy reviews and highlights potential areas for further government intervention (e.g. interest rate subsidies on micromortgages, refinance options for housing finance companies).
What barriers does your proposed solution address?
Asymmetry of information, Informality, Lack of collateral, Lack of financial capacity, Unavailability of financial products tailored to SME needs, Lack of institutional capacity of financial intermediaries.
If you checked any of these barriers, describe how your solution addresses them
The perception that the poor are not credit worthy has been laid to rest to some extent by the continued success of microfinance, which boasts of negligible default rates on its loan portfolio. However, while the target group is roughly the same – informal, low income microenterprises – for both micromortgages and microfinance, there are important differences in the business models. Micromortgages are larger ticket, longer tenure, secured loans compared to its microcredit counterpart. Further, as micromortgages are individual loans and not part of a joint-liability based lending program, the assessment of the credit worthiness of the individual borrower becomes especially crucial.
This assessment is both the basis for success in the micromortgages business and its central challenge. As mentioned earlier, informal sector households might be able to afford a loan of $6,000 but are unable to provide documentary evidence of their income and assets, or proof of residence or identity. Such formal documentation driven loan processing, which is templated and therefore replicable at negligible marginal cost, is the tried and tested approach of conventional housing finance companies. However, this has little relevance for the informal sector. The asymmetry of information can be addressed by replacing the traditional paper-based process with a more hands-on, field-based verification system. For example, in the case of an SME entrepreneur and potential micromortgage customer running a small grocery shop, the loan officer would need to invest time in asking detailed, structured questions about daily sales data, inventory, credit terms with suppliers, living situation, family, personal household expenses etc. to arrive at her average monthly income and residual surplus. This data would then be used to arrive at her credit score and therefore the level of EMI that the borrower can likely sustain over a 15 year mortgage.
At present, barring a few players, the housing finance needs of the informal sector remain largely unserved. For precisely the reasons mentioned above, large private sector banks and HFCs are either unwilling or incapable of devoting the effort required to “downmarket” their products and services. However, a number of commercial MFIs have already shown interest in this space, as have NBFCs including a pioneering gold loans company that has a significant overlap between this target segment and their customer base. MIM is of the view that while the micromortgage business model is certainly different from those currently used by large HFCs and banks, the commercial opportunity and a large, untapped customer base is certain to attract more private sector participation.
Impacto
Provide empirical evidence of your proposed solution's success/impact at present. If your project is in the idea phase, please provide evidence that speaks to its potential impact
While it may be early days to try and measure the success of micromortgages empirically, the ambitious plans and impressive performance of recent entrants along with the high level of private equity interest could be interpreted as indicators of the potential in this sector.
MIM has assisted the Muthoot Pappachan Group (MPG), which has a historic presence in financial services, in establishing a sustainable and differentiated presence in micromortgages. Through in-depth customer research to determine product preferences, strategic reviews with the promoters to discern Group priorities, and MIM’s existing knowledge of this market, MIM has helped build a business blueprint for MPG’s foray into micromortgages. Clearly oriented towards achieving scale, this business plan targets the disbursement of 60,000 micromortgages in a span of five years.
In the last month, Chennai-based Aptus Value Housing Finance – another of MIM’s partners – has announced its plans to offer micromortgages to low income households and has already disbursed $200,000 worth of loans in its first few weeks and has a target of $30 million in its first year of operations. Initially, the ticket size of each loan will be between $20,000 to $40,000 but the company has stated intentions of providing loans as small as $6,000 soon after. Aptus has opened its first branch in Madipakkam, a suburb in Chennai and by October 2010 will add four branches, going up to 20 branches in the state of Tamil Nadu by March 2011. Even though the company has just commenced operations, it already has offers from private equity players for capital infusion of up to $20 million for its future expansion.
Similarly, MHFC, which was incorporated in May 2008, was seed funded by Caspian Advisors (India Financial Inclusion Fund) and the Michael and Susan Dell Foundation within its first year of operations and has already received significant, serious interest from commercial venture funds for its follow-on rounds of equity infusion. Incidentally, Caspian was introduced to the promoters of MHFC by MIM, with the subsequent investment by India Financial Inclusion Fund into MHFC being awarded “Deal of the Month” by CGAP in October 2009. Till date, MHFC has disbursed over $2.2 million in micromortgages with an average ticket size of $8,000 and has recorded nil past dues from its customers thus far.
How many firms do you expect to reach?
MIM believes that the annual volume of low income housing unit sales in India would have risen to 500,000 in the next five years. In part due to the direct and indirect efforts by MIM, nearly 400,000 microenterprises (constituting 80% of all such purchases) are expected to access micromortgages.
What is the volume of private SME finance you aim to catalyze?
At present, the number of micromortgages disbursed in India is estimated at between 8,000 to 10,000 loans per year. With greater private capital in micromortgages over the next five years, this number is expected to increase to 400,000, each with an average ticket size of $8,800. The market for housing finance for microenterprises in 2015 would therefore be $3.5 billion.
What time frame will be required to reach these targets?
The hope is that this initial private sector activity in micromortgages will achieve scale over the next five years and attract more players as commercial viability is established. Alongside, large housing finance companies and private sector banks are also likely to “downmarket” their products and services to cater to low income households. Given this context, MIM believes the target of an annual disbursement of 400,000 micromortgages in five years is both realistic and achievable.
Does your solution seek to have an impact on public policy?
Sim
What would prevent your solution from being a success?
The rapid growth of low income housing projects is the major demand driver for micromortgages. These two businesses are symbiotic and housing finance companies entering micromortgages will be keen to forge partnerships with real estate developers to minimize project risk and leverage customer relationships. Conversely, as Nayan Shah of the Neptune Group, developers of “Swarajya” a pioneering low income housing project in Ambivilli on the outskirts of Mumbai says, “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”.
Another critical success factor will be improving the financial literacy levels of borrowers. The importance of financial discipline, establishing individual creditworthiness and the moral obligation to repay need to be clearly enunciated to the informal sector borrower, which requires investment in customer education by all interested stakeholders in micromortgages. Without this, the resulting consequence of higher non-performing asset levels will inhibit the viability of the micromortgages business model.
Temas relacionados à inscrição
Describe the social impact of your innovation. Please include both numbers and stories as evidence of this impact
The following illustration of a typical MHFC customer provides insight into the social impact that micromortgages has for the hitherto marginalized informal sector borrower, one of 21 million such households in the country.
Rameshbhai [name changed for confidentiality reasons] is an autorickshaw driver. He earns between $170 and $200 a month, but he has no proof of this income. He files no income tax returns and naturally does not issue himself salary slips. He does not keep any accounts of his income or expenditure, but he does have a bank account, which he barely uses. He has no proof of his current address. He has about $1,500 of savings and is applying for a loan of $5,500. Most housing finance companies would have him back out on the street before you could say “non-performing asset”, but MHFC is not one of those companies.
Employing the field-based verification process referred to earlier, Ashish Kothari, the loan officer who is serving Rameshbhai, begins the process of assessing his application. It is important to note that this whole process helps document and quantify facts about the customer that were previously unconfirmed. The risk associated with Rameshbhai has not decreased due to the storyboarding of his personal and professional life and verification – it has simply been better understood. Low income, informal sector customers are often considered “high risk” by conventional HFCs, but in reality they are often simply “unknown risk”. Companies like MHFC, MAS, Dewan and Gruh have taken the time to understand these customers, and in doing so have developed a fundamental belief that they can be reliable repayers, just like their high income counterparts. Rameshbhai will finally have a chance to achieve his dream of owning his own home.
SUSTENTABILIDADE
List all the funding sources that are required for the sustainability of this solution
MIM is currently funded in part by donor contributions from grant institutions and multilateral agencies that recognize the social need and impact that micromortgages can have on the informal sector microenterprise in India. Simultaneously, MIM is also engaged on commercial terms with private sector players looking to set up micromortgage ventures such as the Muthoot Pappachan Group. Both these sources of funding – donor and private – help MIM perform its role as a catalyst for micromortgages in India.
Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?
A decade ago MFIs were structured as not-for-profit companies that depended solely on charity and grant money to serve the credit needs of the poor. However, as the sustainability – and more importantly commercial viability – of the business model gained prominence, most MFIs began the transformation process into NBFCs and for profit companies to be able to access private capital for expansion. Today, India’s biggest MFI, SKS Microfinance, is listed on the stock exchange after having been through multiple rounds of private equity. The assumption is that micromortgages will evolve in a similar manner over the next five years. Greater private sector participation – and therefore capital – will naturally follow once there is proof of concept and an established track record of low default rates on the loan portfolios of early entrants.
The transition of micromortgages from a niche in the housing finance market to a high-growth, large scale sector will also imply that MIM would have achieved what it set out to do and therefore will no longer be dependent on public finance for this campaign. However, MIM’s mission in the social sector is broad, and we will work to create similar social change by identifying, developing and catalyzing business models across sectors – water, education, healthcare – to help improve the lives of the poor.
Demonstrate how your proposed solution will survive a potential loss of its largest private funding source
MIM depends considerably on soft funding options to continue its work as a catalyst for informal sector micromortgages in India. A diminished scope and role for MIM on account of a loss of funding sources would slow down the process of dissemination of the micromortgages market opportunity that MIM is involved in currently. The existing momentum in micromortgages should ensure that more players enter this market over the next few years, but the pace of such activity would certainly benefit from the presence of a non-aligned, well-informed changemaker.
Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation
Continued regulatory support from the Ministry of Housing and Urban Poverty Alleviation and the National Housing Bank is critical for further growth of low income housing – and therefore micromortgages – in India. For example, one such program being run by the Government is the Interest Subsidy Scheme for Housing the Urban Poor (ISHUP), which provides interest rate subsidies to economically weaker sections and low income households/ microenterprises to enable them to buy or construct houses.
Another important partnership that needs to be forged is with long term providers of debt capital such as insurance companies and pension funds. At present, most micromortgage ventures are seed funded with equity from promoters and venture capitalists, and have limited access to bank debt and refinance lines from the National Housing Bank for at least two years post commencement of business. Access to long term debt will not only lower the cost of capital for housing finance companies – and thereby improve returns on assets and to equity holders – but also allow promoters of these companies to focus on operations rather than capital raising compulsions.
Are there non-financial issues that could threaten the sustainability of your proposed solution?
Money lenders, family and friends have been the traditional sources of finance for the informal sector entrepreneur to meet both her business and personal requirements. Money lenders lend at usury rates of interest, which coupled with a lack of financial discipline on the part of the borrower, is often the cause of the debt trap so prevalent in the informal sector. On the other hand, family and friends presumably lend at fairly flexible repayment terms, which is also not conducive to the adoption of greater financial prudence amongst this community. However, the assumption of low default rates at 2-4% is the cornerstone of the commercial viability of the micromortgages business and any significant upward deviation in this percentage, whether caused by an inability or unwillingness to repay on the part of the borrower, would seriously threaten its sustainability. Therefore, early investment in customer education and the resultant evidence of improved financial literacy of the informal sector borrower is critical for continued growth of the micromortgages market in India.
Please tell us if your proposed solution aims to scale up through a high growth sector, expand immediately to multiple sectors, and/or scale up geographically
As mentioned earlier, the growth of the micromortgages market dovetails into the expansion of low income housing projects across the country. Compared to a few years ago, there is significant activity in low income housing with an estimated 25,000 to 50,000 units in the range of $6,000 to $25,000 under various stages of construction.
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