With the novel objective of making Tamil Nadu the first ‘hut free State’ in the country by 2016, the state government launched a rural housing scheme called “Kalaignar Veedu Vazhangum Thittam” (KVVT) for rural areas with the objective of replacing all thatched houses in villages with robust all-weather houses over a 6-year period. The KVVT scheme comprises a grant of Rs. 75000 per house, which includes both cash and material components. Both cash and material grants are made in 4 tranches.
Only one problem!
Each tranche is disbursed upon the completion of a ‘stage’ of construction (such as upon the completion of the basement, or walls, etc), and clients have found it difficult to raise the finance required for the completion of each stage upfront.
To plug this gap, IFMR Rural Finance has devised a Housing Finance loan product that is currently being piloted in Alakkudi and Karambayam villages of Thanjavur district. This product serves as both a bridge and additional financing option for people eligible under the KVVT scheme.
The loan amount is in the range of Rs. 12000 to Rs. 25000, with monthly repayments and having a tenor of 3 years. One of the salient features of the product is that the customer can pre-pay or pre-close their loan when they get their tranche from the government for the portion constructed.
Mr. Shanmugavelu Mottaiyapillai of Alakudi, the first housing finance loan customer of Pudhuaaru KGFS who had availed a loan of Rs. 25000.
Amongst the basic pre-requisites for the loan are: 1) The customer should be eligible for the KVVT grant 2) The customer should have a clear title deed/patta for the property.
To our surprise, however, the need for a clear title deed wasn’t as simple as we thought.
Three weeks into the pilot we found that a majority of the residents of the two villages didn’t have proper title deeds/patta for their property, thus making it difficult for them to avail the loan. Taking this into consideration we had to make changes to our product eligibility requirements to suit some of the different scenarios as below:
• Land title in the name of client and few other people (siblings generally)
• Client’s land title in the name of deceased parent
• Client’s land title in spouse’s name but spouse is not available (out of country, state)
In special cases, where the government allots property to individuals, but passes on a certificate of ownership but not the title deed, we encourage such cases to avail a customised JLG Housing Finance loan than the regular one. This product has monthly repayments and a tenor of 18 months.
So far, out of 55 individuals in Karambayam and 26 individuals in Alakkudi who are eligible under the KVVT scheme norms, 9 in total have availed of our product. Working in close coordination with the local gram panchayat, the team intends to expand the pilot to other villages and adopt the learnings to refine the product. Watch this space for more updates on the progress.
13 Responses
Great product. Majority of the households live in thatched huts and our intervention will surely expedite the process of converting the hutments across the villages to concrete ones. We will in the process touch the lives of each and every household.
Great product. Majority of the households live in thatched huts and our intervention will surely expedite the process of converting the hutments across the villages to concrete ones. We will in the process touch the lives of each and every household.
Good beginning. Would be keen to know what the plans for this effort are going forward.
Good beginning. Would be keen to know what the plans for this effort are going forward.
A housing loan is the most important high leverage pure “consumption” loan that an individual will take (assuming she wants to live in the home). If the loan is being given against the cashflows of the household then a very careful evaluation of the stability of the cashflow and the net availability of cash surpluses to repay this loan will need to be carried out. This is very different in character from the JLG loans which are really cash-management products to manage short-term mismatches and not “consumption” loans.
Financial institutions correctly assume that there is positive net collateral value (referred to as Home Equity) but this is a highly volatile number (sharp declines in these values was the principal trigger for the 2008 US Subprime Crisis) and comes with much hardship for the borrower (eviction: http://nyti.ms/hql3rF) and liquidation challenges for the lender (severe difficulties with regard to both repossession and sale may be anticipated). Which is why, in my view, it is more appropriate to assume that the positive value of Home Equity will influence Expected Default Frequency (EDF) but not Loss Given Default (LGD).
Such loans are therefore most appropriate for salaried employees with good job security who are buying their first home from high quality builders in upscale neighbourhoods and not necessarily for low income households. An early investment in a house using borrowed money is also not necessarily the best asset-allocation decision for rural households where appreciations in these values (and therefore accretions to Home Equity) are modest.
A housing loan is the most important high leverage pure “consumption” loan that an individual will take (assuming she wants to live in the home). If the loan is being given against the cashflows of the household then a very careful evaluation of the stability of the cashflow and the net availability of cash surpluses to repay this loan will need to be carried out. This is very different in character from the JLG loans which are really cash-management products to manage short-term mismatches and not “consumption” loans.
Financial institutions correctly assume that there is positive net collateral value (referred to as Home Equity) but this is a highly volatile number (sharp declines in these values was the principal trigger for the 2008 US Subprime Crisis) and comes with much hardship for the borrower (eviction: http://nyti.ms/hql3rF) and liquidation challenges for the lender (severe difficulties with regard to both repossession and sale may be anticipated). Which is why, in my view, it is more appropriate to assume that the positive value of Home Equity will influence Expected Default Frequency (EDF) but not Loss Given Default (LGD).
Such loans are therefore most appropriate for salaried employees with good job security who are buying their first home from high quality builders in upscale neighbourhoods and not necessarily for low income households. An early investment in a house using borrowed money is also not necessarily the best asset-allocation decision for rural households where appreciations in these values (and therefore accretions to Home Equity) are modest.
I realise that this Home Loan product however is very different from the traditional one that I referred to in my previous post and is very well suited to the circumstances of the rural household. This is more in the nature of bridge finance where the primary collateral is not the value of the home or the cashflows of the individual in question but expected receipts from the government. In my view, there are three key risks that would then need to be addressed: (a) death of borrower during the pendency of the loan; (b) non-receipt of the money from the government; (c) non-payment of the amounts by the borrower to the lender despite having received the money from the government. It would be interesting to learn how these three risks have been explicitly covered under this product structuring since they have an impact on the quality of the primary collateral.
When we discussed the product design, one aspect that troubled most people was the fact that if we designed the loan to be purely a bridge finance dependent directly on grants, then we were completely at the mercy of the government grant (uncertainities around timeliness and quantum) and the repyament incentives it would create among clients in case of non-availability of grant for any reason. This is due to the fact that there was no clean mechanism that would allow us to escrow the grant tranches from the panchayat directly.
Because of these constraints, we felt that it would be best to provide the financing (a maximum of 25,000 or 33% of the total expected grant) directly to the client without tying it to the grant. The product allows pre-payment, so the client can pre-pay partially or completely if he so desires. Also, we take his land title as security to ensure that he has incentive to repay.
As to whether ownership housing is a desirbale investment for LIH (something we have discussed previously and agree that it is not), the argument for this product is that a large part of the financing for the house is ‘free’ and we only provide a small component that the client can choose to use as bridge or additional financing and complete the house that he or she is already building.
We do a cash flow analysis for the households at the time of loan origination and ensure that EMI on the loan does not exceed 15% of this amount. The loan to the client will be decided based on this limit (with a max loan amount of 25000).
We have deliberately kept the loan amount to a low upper limit of 25000 so that it used only for the purpose of bridge financing or very limited additional financing to complete the house. Holding land title ensures incentive to repay and ensuring that EMI does not exceed 15% of expected monthly income helps to contain the loan repayment at manageable levels.
This approach makes a lot of sense Anand. Look forward to learning more about the actual experience on the ground as you roll out the product.
I realise that this Home Loan product however is very different from the traditional one that I referred to in my previous post and is very well suited to the circumstances of the rural household. This is more in the nature of bridge finance where the primary collateral is not the value of the home or the cashflows of the individual in question but expected receipts from the government. In my view, there are three key risks that would then need to be addressed: (a) death of borrower during the pendency of the loan; (b) non-receipt of the money from the government; (c) non-payment of the amounts by the borrower to the lender despite having received the money from the government. It would be interesting to learn how these three risks have been explicitly covered under this product structuring since they have an impact on the quality of the primary collateral.
When we discussed the product design, one aspect that troubled most people was the fact that if we designed the loan to be purely a bridge finance dependent directly on grants, then we were completely at the mercy of the government grant (uncertainities around timeliness and quantum) and the repyament incentives it would create among clients in case of non-availability of grant for any reason. This is due to the fact that there was no clean mechanism that would allow us to escrow the grant tranches from the panchayat directly.
Because of these constraints, we felt that it would be best to provide the financing (a maximum of 25,000 or 33% of the total expected grant) directly to the client without tying it to the grant. The product allows pre-payment, so the client can pre-pay partially or completely if he so desires. Also, we take his land title as security to ensure that he has incentive to repay.
As to whether ownership housing is a desirbale investment for LIH (something we have discussed previously and agree that it is not), the argument for this product is that a large part of the financing for the house is ‘free’ and we only provide a small component that the client can choose to use as bridge or additional financing and complete the house that he or she is already building.
We do a cash flow analysis for the households at the time of loan origination and ensure that EMI on the loan does not exceed 15% of this amount. The loan to the client will be decided based on this limit (with a max loan amount of 25000).
We have deliberately kept the loan amount to a low upper limit of 25000 so that it used only for the purpose of bridge financing or very limited additional financing to complete the house. Holding land title ensures incentive to repay and ensuring that EMI does not exceed 15% of expected monthly income helps to contain the loan repayment at manageable levels.
This approach makes a lot of sense Anand. Look forward to learning more about the actual experience on the ground as you roll out the product.
This post is very informative, thank you. I was wondering if it would make sense to promote eco-friendly houses (also called mud houses) to our customers. They are living in thatched roof houses, why can’t we help them convert these to mud houses built with organic building material? I am aware that we are not into real estate/construction, but, since there is a ‘go organic’ wave (reference: Laurie Baker International School of Habitat Studies), could we also promote mud houses? I found these links informative:
1) http://www.vasthukamarchitects.com/profile.aspx
2) http://economictimes.indiatimes.com/markets/real-estate/the-trend-of-mud-house-construction-is-making-a-comeback/articleshow/14178255.cms
3) http://ebdewy-mudconstructions.blogspot.in/4)
Thank you for reading.