Micromortgages:

A MACRO OPPORTUNITY IN LOW-INCOME

HOUSING FINANCE
MONITOR INCLUSIVE MARKETS
OVERVIEW: URBAN LOW-INCOME HOUSING MARKET
Tens of millions of Indias low-income urban families live in poorly con-
structed homes, with deplorable sanitary conditions and lacking in basic
amenities. Despite strong demand, lack of access to quality affordable hous-
ing has historically been a critical challenge for this group. Households earning
between `7,500 and `25,000 can afford to buy apartments costing `3-10
lakhs a market that, according to our research, is worth almost `1,100,000
crores (US$242 billion) today and growing fast. Encouragingly, in a recent
study Monitor found that more than 40 developers are starting to address this
low-income market in India. These include players like Value Budget Housing
Corporation (VBHC), which has announced plans to build a million homes
below `10 lakhs in the next decade.
THE NEED FOR MICROMORTGAGES
Historically, the vast majority of housing nance activity has focused on the
middle and high income segments of the formal sector market, as low-in-
come and especially, informal sector households have been deemed both
high risk and too expensive to serve. As a Chairman and Managing Director
of a large Indian bank said, My staff can only interact with paper, not peo-
ple how can I serve this segment? The resultant nancial exclusion is not
only a glaring gap in social equity, but also a missed commercial opportunity.
However, there are some micromortgage companies serving this segment: new
companies such as Micro Housing Finance Company (MHFC) and MAS Fi-
nancial Services, and pioneer small ticket
housing nance companies like Dewan and
Gruh are among those addressing the mar-
ket gap. Last year, however, the companies
mentioned above cumulatively disbursed
only a few thousand loans to this customer
segment, leaving a huge unserved market.
Thus, there is still a signicant and urgent
need for more new entrants and existing
housing nance players to offer micromort-
gages to low-income households.
HIGHLIGHTS:
Low-income housing market at
US$242 billion and growing fast
Increasing low income housing
supply especially with entry of
scale players like VBHC
Access to home finance the great-
est impediment to growth of low
income housing supply in India
Few existing mortgage institutions
have the capability to directly bank
the informal sector using existing
business model
5 Lakhs
7 Lakhs
10 Lakhs
TICKET SIZE
(IN `)
1
EASE OF ASSESSING RISK
Large private Banks, HFCs
Some low-income developer tie-ups,
but strictly formal sector
Limited to no capability / interest in
informal customer risk assessment.
Select HFCs
Alternate means of income assessment for
higher income customers such as supplier
and customer checks, or MFI and chit fund
savings history; guarantor typically required
E.g.: Dewan Housing
Average loan size: ` 650,000
Largely Under-served
Low-end focused HFCs
Limited geographic
coverage and capacity.
Small ticket size of loans
E.g. : GRUH
Average loan size: ` 445,000
Informal
Earns in cash
No formal income
documents. No formal
residence/identity
documents
Salaried or Self Employed
Significant proportion of
undisclosed income
Some residence/identity
documents
Formal
Salaried with pay slip
Income Tax documents
Residence Documents
Identity documents
Bank account
2 Lakhs
Willing to give loans only on
documented income account
E.g.: HDFC, ICICI
Average loan size:
` 1.5 million
Note:
1
Indicative of the primary product offering (usually average ticket size), though other loan sizes and products may also be offered
Source: Primary research and interviews with housing finance companies and stakeholders; For a full list of sources used, please see Nodes & Sources
slide in the Appendix of the full report "Building Houses, Financing Homes"; which is available in the public domain, and available for
download at the NHB and Monitor websites
Housing Finance Market Map
THE COMMERCIAL OPPORTUNITY IN MICROMORTGAGES
The market for micromortgages for low-income households is `825,000 crores
(US$ 182 billion). A new housing nance company (HFC) that serves the
low income segment can achieve a Return on Equity (RoE) of 18-25%
and Return on Asset (RoA) of 3% over a 10 year time frame competing
with the returns observed in the traditional housing nance industry. Financial
services companies that are already serving a similar customer base can leverage
their existing distribution infrastructure to reap even higher returns through
cross-selling to a well-seasoned and known customer base as well sharing chan-
nel costs to acquire new customers. Thus, allied businesses such as NBFCs and
(urban) MFIs are ideally positioned to tap this market. This is evidenced by the
interest in micromortgages already shown by a number of commercial MFIs as
well as entry of NBFCs like Muthoot Pappachan Group, a pioneering gold loan
company, that already engages a large group of low-income households.
The overall environment for micromortgages is supportive. There is signicant
interest on the part of the investment community, especially from private equity
rms. Government schemes such as the Rajiv Awas Yojana offer subsidies on
small ticket housing loans, while the National Housing Bank looks to strongly
encourage housing nance companies that are serving low-income customers.
Given that micromortgages are in great demand, collateralized, affordable and
commercially sustainable, Monitor believes that the market has extremely high
potential. Additionally, we believe that the social impact on low-income house-
holds could be even greater than that of microcredit, possibly with an even
faster track to scale.
CRITICAL SUCCESS FACTORS
The business model for micromortgages is notably different from conventional
housing nance. The major challenge in the near term, particularly with regard
to the untapped informal sector, lies in designing the methodology to measure
credit risk. A hands-on, eld-based verication system will have to replace the
traditional documentation-driven credit scoring approach, as informal sector
customers lack salary slips and income tax returns. Given the costs of setting up
physical branch infrastructure and the relatively small ticket sizes of the loans,
micromortgage companies will need to optimize branch utilization to control
transaction and servicing costs. Additionally, gaining access to debt at competi-
tive rates will be an important factor if micromortgage companies are to keep
prices low for the end consumer.
HIGHLIGHTS:
Large, untapped market for
micromortgages in India
US$ 182 billion
RoE estimated at 18-25% and RoA
at 3% over a 10 year time frame
Companies leveraging existing
customer base and infrastructure
can look forward to even higher
returns
Active interest on part of the
investment community and a sup-
portive regulatory environment
Managing credit risk and opti-
mizing branch utilization will be
critical for new micromortgage
companies
A detailed study on the
opportunity, Micromortgages:
A Macro Opportunity for
Low-income Housing Finance
is available at our website
www.mim.monitor.com. For
more information and partnering
opportunities contact
Bala Venkatachalam,
bala_venkatachalam@monitor.com.
continues to catalyze markets
for market based solutions in
India, Africa and elsewhere.
For more information and
partnering opportunities, contact
inclusivemarkets@monitor.com
and see our website
www.mim.monitor.com
COPYRIGHT 2010 BY MONITOR COMPANY GROUP, L.P.
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MICROMORTGAGES: A MACRO OPPORTUNITY IN LOW-INCOME HOUSING FINANCE