Issues of Low Income Housing: Lenders Perspective

Technical Session II: Low Income Housing Finance

Conference on Affordable Housing and Housing Finance &
Formal Launch of e-Platform South Asia Housing Finance Forum (SAHF) Site
January 27, 2010

Good afternoon ladies and gentlemen:

It is indeed a pleasure to be here and I would like to thank the organisers for inviting me
to talk to you today. The National Housing Banks initiative of launching an e-platform to
serve as a knowledge sharing and networking medium on housing finance for South Asia
is a commendable effort and I am certain many housing finance providers will benefit
from such a forum.

Housing is not just a basic necessity. For most people, owning a home is a big
achievement and provides a tremendous sense of security to an individual. If there is one
learning that housing finance lenders should remember in the aftermath of the global
financial crisis, it is that irreparable damage has been done to the lives of several ordinary
people who were not just de-housed, but who also lost their dreams and the aspirations of
their families. So irrespective of the income strata, I sincerely believe that lenders have an
obligation that goes beyond just providing housing finance to customers. Lenders have a
moral responsibility of ensuring that housing finance products are not mis-sold to
individuals. It is equally important for lenders to ensure that customers also fully
understand the housing finance products they opt for.

Despite India being the second fastest growing economy, the chink in its armour has
always been the state of its infrastructure and the acute shortage of housing. To the
discerning eye of a visitor to India, the rapid economic growth is not reflected in the
quality of urban infrastructure or civic life. India is urbanising at a pace that is higher
than the world average. Its cities today are unable to cope with the burgeoning
population. Projections indicate that by 2030, more than 40% of the countrys population
will be residing in urban areas compared to the present 28%. Economic development and
urbanisation are inextricably linked. Cities have created employment opportunities and
are generators of wealth, with 55% of the countrys GDP being contributed from cities.
But as the housing stock is unable to keep pace with the demand, the result has been an
environment of mushrooming unauthorised constructions, congestion and proliferation of
slums and degradation of the urban living experience. Adding to these woes is the severe
shortage of basic amenities, with scores of citizens continuing to be without power, water
and sanitation.

In India, there are huge disparities in income levels. When we talk about the target
segment for affordable housing, it includes both, the middle-income group and the low
income or economically weaker sections of society. So far, the formal housing finance
market has been reasonably effective in being able to serve the middle-income group.
The housing finance industry in India has been growing rapidly as a combined result of
improved affordability brought about by higher disposable incomes, lower interest rates
and fiscal benefits. Developers have also recognised the strong demand for homes in the

middle-income segment and not the high-end luxury segment that they used to
aggressively target earlier. Thus developers are concentrating on building more homes for
the middle-income group with costs in the range of approximately US $ 65,000 to US $
100,000.

However, providing low-income housing has remained extremely challenging. The

economically weaker section and the low-income group are defined as households with
annual incomes ranging between US $ 850 to 2,000 per annum. Clearly, only marketbased solutions cannot work. For the low-income group, we cannot just talk about
affordability factors - some form of subsidisation is required. What is therefore needed
for the low-income group is an inclusionary housing policy. Solutions for this segment
need to be found through inter supportive public-private arrangements. This requires a
collaborative effort of the government, developers and lenders.

Given the huge shortage of housing, the private sector has to be urged to participate in the
low-income housing segment, but the government also needs to create an enabling
environment. For instance, if developers are provided a fast-track, single window
clearance mechanism for affordable housing projects and if the land is provided by the
government, developers would be sufficiently incentivised to build mass housing units.
Further, if land titles are clear, most lenders would not hesitate to make small ticket sized
loans.

In some pockets, slum rehabilitation schemes have worked well. Under these schemes,
the developer provides the slum dwellers with permanent structures, typically a one-room
tenement with an attached bathroom free of cost, while the developer benefits from the
surplus land which can be used for commercial purposes. However, often these schemes
fail to take off if it gets mired in political controversies.

The high cost of land in metro cities is one of the greatest hindrances in providing
affordable housing. However, if homes are built in far flung outskirts where the land may
be cheaper, there are often no takers for such homes since the necessary infrastructure in
terms of mass rapid transportation systems, schools, hospitals and other civic amenities
may not be available. The solution lies in having to integrate the process of providing
connectivity and infrastructure amenities along with mass scale housing.

The total urban land stock in India is only 2.3% of the countrys total geographical area,
but houses 28% of the countrys population. Thus at a policy level, there is a need to
bring in additional urban lands on a regular basis. The process of land acquisition and
conversion of agricultural lands for urban use also needs to be simplified. There is also a
need to rationalise stamp duties, review processes for master planning, provide for
upward increases in the floor space index, which must be commensurate with investment
in infrastructure and encourage more in-situ development.

Now again, if we look at inclusionary housing policies, we find that issues of low income
housing in urban and rural areas are vastly different. For instance, housing remains

unaffordable to a large population in urban areas due to distortions in land prices. On the
other hand, in rural areas housing inadequacy is reflected in the mismatch between
desired and actual housing quality. Poor construction material, small homes and
insufficient amenities are some of the major hindrances. Nearly three-fourths of Indias
population lives in rural India. However, the requirement of housing finance in rural areas
is predominantly for the upgradation of houses especially for improving basic amenities
such as access to drinking water, sanitary facilities, cooking space and better power
connections.

The government on its part has certainly tried to bridge this shortage and has introduced a
number of commendable rural initiatives including the Indira Awas Yojana, the Bharat
Nirman Programme and the National Housing Banks Golden Jubilee Rural Housing
Scheme.

Scaling up rural housing finance has numerous advantages for housing finance players as
it would diversify their loan portfolio and provide access to a relatively untapped market.
On a pilot project basis, HDFC has been offering various rural housing finance products.
But while laying the groundwork for offering an effective rural housing finance product,
we came across a few challenges and roadblocks.

For instance, the biggest hindrance is the restriction on taking agricultural land as
collateral for lending for non-agricultural purposes. Other challenges include difficulties
in estimating the level of income of borrowers, particularly agricultural income, which

fluctuates depending on the vagaries of the weather. However, on a positive note, the
rural economy is seeing a distinct shift away from the predominance of agriculture. It is
estimated that over 35% of rural households are now engaged in non-agricultural
activities.

The micro-finance sector continues to grow quite rapidly in India and the experiences of
recoveries have been good. However, most of the MFIs are small in size with a limited
reach. The real challenge today lies in scaling up such operations. In order to encourage
financers to lend for low cost housing, there is a need for clear land titles, introduction of
mortgage insurance and a need for better credit data. In fact, for a financial institution
foraying into the rural markets, it is imperative to tie up with the right Non Governmental
Organisations (NGOs) or micro-finance institutions since their role as intermediaries
involve disbursement and collection of loans. The intermediarys reputation and
credibility is of utmost importance for the financial institution. Further, given the lack of
financial literacy, rural people tend to be more susceptible to instances of fraud. Thus,
technological innovations such as biometric and audio enabled ATMs customised in the
local language will help bring in transparency and reduce operational and transaction
costs. Mobile phones will also revolutionise the way financial transactions take place and
the greatest beneficiary of this is likely to be the rural sector.

I would like to share a few initiatives undertaken by HDFC towards low-cost housing.
Our objective is to integrate low-income clients into HDFCs mainstream products and
services. After 10 years of HDFCs operations, the company created a Shelter Assistance

Reserve, wherein a portion of the profits are transferred each year for participating in
and supporting social initiatives, which includes low cost housing initiatives. HDFC was
also fortunate to get access to low cost funds from KfW, Germany to expand its lending
operations to the economically weaker sections of society. HDFC was one of the first
financial institutions in India to take equity stakes in dedicated micro finance companies.
HDFC also partners with NGOs having grass-root level involvement to identify families
with genuine needs. This collaboration has enabled HDFC to construct quality houses at a
lower cost without contractors, demonstrate high recovery rates and offer small size loans
for repairs and upgradation. But most importantly, it has enabled HDFC to emphasise on
the self-help approach where the borrowers contribute locally available building
material and labour. Thus, we have in a small measure, been able to provide low cost
housing, while simultaneously enabling the borrower to engage in some income
generating activity.

In terms of financial market development, there is a need for a deeper debt market, which
can provide lenders with long-term resources. Pension funds, which have a long-term
investment horizon should be allowed to invest in long-term debt instruments issued by
housing finance companies. I am also confident that once there are mortgage guarantee
products available, it will help lenders to tap a different customer base, thereby widening
the market.

In conclusion, the total housing requirement of 26.53 million estimated by 2012 leaves us
with a huge challenge to overcome. India cannot attain its aspirations of being a

developed country as long as large segments of its people do not have a place to call
home and there can be nothing more progressive for a nation than building a property
owning democracy.

Thank you.
Renu Sud Karnad