Subprime borrowers see more room in affordable housing
While the Reserve Bank of India (RBI) has been cautioning against pile-up of bad loans in the affordable housing segment, home loans to subprime borrowers have emerged as a whole new category.
According to the data from the National Housing Bank, currently there are about 91 housing finance companies (HFCs) operating in India. Within the last two to three years, close to 15-20 companies have come up with focus on lending to the informal sector that typically do not possess requisite documents to avail of loan from banks or bigger financial institutions.
In the last one year, there has been a particularly steep growth in micro housing loans, or loans below ~500,000. These subprime, or ‘thin-file’ customers, as they are commonly called, as opposed to ‘thick-file’ customers, are charged 5-6 per cent higher interest rates than the prevailing market rate. A typical borrower could be an artisan, driver, domestic help or daily wageearner. What differentiates the loan from a normal housing loan is the monthly repayment cycle, along with tight monitoring of the portfolio through personal contact — a model similar to microfinance. However, unlike the microfinance model, loan in the micro housing sector is generally granted with collateral, which comes in the form of paltry savings. Last month, the RBI in its monetary policy said, “After a careful analysis of the housing loan data, it has been observed that the level of non-performing assets for ticket size of up to ~200,000 has been high and is rising briskly.”
However, for the new class of micro housing loan lenders, the circumstances are just apt for limitless growth. While government has prioritised housing for all by 2022, the market for affordable housing remains an unclaimed territory. The Pradhan Mantri Awas Yojana, launched in 2015, expects to provide close to 20 million houses through various subsidy and partnership plans.
“For mortgage lenders, the affordable housing segment has been both a large opportunity and a large challenge. Over the past five years, a significant number of HFCs has focused on the affordable end of the housing markets and built a robust business model around it. We are seeing strong growth, good profits, and a significant interest from equity investors in such HFCs. From the standpoint of the clients, the pricing is high as compared to what prime borrowers pay. But availability of credit and a convenient ‘thin file’ process are the key factors driving growth,” said Alok Prasad, former chief executive officer, Microfinance Institutions Network.