In the previous post of this series, we discussed the status of rural housing and motivations that determine the pattern of construction/upgradation of houses in rural areas. From the point of view of financial inclusion, such understanding of rural housing presents a huge unmet opportunity for an alternative model of housing finance. In recent times there have been Housing Finance Companies (HFCs) that operate with a focus towards customers in informal sectors. In this post we look at an HFC we recently visited.
Swarna Pragati’s housing finance model
With a vision to work in the rural housing market focusing on low income households, Swarna Pragati Housing Microfinance, a Housing Finance Company, started its operations in Maharashtra, Orissa and Karnataka. Swarna Pragati has tried to address innovatively the challenge of income assessment. This relationship based model aims at leveraging the established relationship and network of NGO-MFIs and the proven model of group liability to assess the ability to repay. Swarna Pragati partners with NGO-MFIs with considerable experience of operating in the geography. It relies on the documents which reconfirm the tenure of occupancy of the household in the absence of clear and proper title documents. The model primarily counts on the sentimental value attached to the house, and secondarily on the endorsement of mortgage in local revenue records, to address the challenge of willingness to repay. The para legal documentation acknowledges the mortgage in the absence of proper or complete title documents that can be deposited to create a mortgage. Since Panchayat Raj Institutions (PRIs) are local institutions which are very close to the borrowers, involvement of PRIs is respected by the borrower and the local community.
The housing finance to the low-income household is guaranteed by the group (in which the household member is part of) which has a recorded credit history with the NGO-MFI. Other features of the product are incremental financing and shorter tenure designed for incremental house building. Incremental financing helps in breaking up the housing loan into smaller parts, matching the requirement of the rural borrower who builds the house in modules/incrementally.
An incrementally financed, small-ticket, shorter tenure loan helps in matching the repayment capacity of the borrower. The balance between size of incremental housing finance and shorter tenor housing finance product is achieved on the basis of feedback and the strong relationships within the group and the local institutions. The operational restriction of disbursement to only 50% of the group members at any point in time is an in built risk mitigant in the model, preventing strategic and wilful default.
Swarna Pragati has rolled out its operations in three states through 7 partners and has reached out to more than 2500 customers during the last two and half years. The average size of housing finance that it provides is around INR 75,000 with tenure ranging from 36-60 months. During this short period of over two years of operations, Swarna Pragati has been able to maintain nil NPAs during this period.
Challenges
This model however has a few challenges left to be addressed:
- The NGO-MFIs whose relationships and networks are leveraged upon relies on projects and grants that it accesses. In the event of any disruption to this, and due to the short term nature of such activities, the sustainability of partner institutions presents itself as a challenge given the longer term call that a Housing Finance Company takes.
- The marketability of repossessed property in rural areas in case of default is very difficult. This limitation reduces the mortgaged property to act as a deterrent to default, and in case of default, the value of the collateral is called into question.
In the context of the huge shortage of housing not just in terms of the number of units but also the quality of housing especially in rural areas, there is a definite need for innovative housing finance models like that of Swarna Pragati. The uniqueness of rural housing calls for a differentiated approach to address the specific requirements of the target segment. Further scalability of such models in other parts of India would largely depend on addressing the risks and challenges outlined.
2 Responses
You’ve pointed out some very critical aspects that differentiate rural housing:
i) With low floating population seeking residence, the “market” doesn’t exist the way it does in an urban / developed area.
ii) the house provides the stability for the household – residence, property protection etc.
iii) the target consumers of finance will often be landless or with small land tracts on which they build. The latter isn’t a glitch as only construction costs come into play. The former is a glitch as the landless will have to acquire land without too much upside in prices.
Why not consider an approach that:
i) Provides security of tenancy on land – this can leased for nominal fee to a group of house owners or individual house owners. If proximate housing is acceptable (it should given a JLG functions because of such proximity) creating infrastructure will also become more economical – water/sewerage, electricity, telecom, playground, creche etc.
ii) For the house owner to invest – he / she has to split proceeds of sales with the Panchayat. This provides incentive for the owner to invest in the house/property but not profit from taking over land rights literally free. (s)he doesn’t have to pay for land rights until a sale realizes the gains. The gain goes to the Panchayat for its use towards common good the village area – effectively capital gains accrueing to the PRI.
Just a thought.
By sheer coincidence I read this today:
http://online.wsj.com/article/SB10001424127887324009304579040862988907966.html?mod=djemEditorialPage_h
The challenge isn’t just about the brick and mortar of a house and finding the money to build it. But integrating this into an overall life that gets better. The above is an approach. Hope you find it useful.