Scaling up Housing Microfinance Study by IFMR Capital IFMR Capital - - PowerPoint PPT Presentation

Scaling up Housing Microfinance

National Housing Bank Department for International Development Study by IFMR Capital

IFMR Capital - Innovation in Informal Markets

• IFMR Capital works closely with originators that cater to low income households

across the country. These originators could meet varying needs of its clients, including working capital, enterprise funding, short term needs, housing requirements etc.

• Over the past 6 years, IFMR Capital has developed considerable competitive

advantages in this space including:

• Strong underwriting guidelines and entity selection criteria
• Risk models to understand asset performance
• High quality monitoring and surveillance team that monitors each and every

credit multiple times a year

• Deep relationships borne out of taking own exposure in each transaction
• Each investment decision is backed by strong underwriting capability. Each client
• f IFMR Capital is amongst the best in its class, capable of delivering strong,

sustained performance

• For this reason, transactions structured by IFMR Capital have witnessed nil
• verdues and significant rating upgrades since inception
• Currently, we cover the following asset classes - microfinance, affordable housing

finance, small business loans and commercial vehicle finance

• Launched practice in affordable housing finance in 2011 and developed a

strong originator base of 12 HFCs in affordable housing finance across the country

• IFMR Capital is an A /

A1 rated, non-deposit taking Non Bank Finance Company, focused on providing debt capital markets access to originators that affect low income households

• IFMR Capital has

raised INR 75 billion (c.USD 1.4 bn) for its clients with a zero delinquency track record till date

• Balance sheet size and

profitability grown significantly

• Completed over 150

rated capital market transactions with over 50 originators in the last 5 years

• Ratings upgrades on
• ver 75 tranches of

securitizations till date

The Study

The study was commissioned by the National Housing Bank (“NHB”) and the Department for International Development (“DFID”) with the following objectives:

• To evaluate the performance of the housing microfinance program (HMF) initiated by

the NHB.

• To conduct a representative study across rural and urban poor and ascertain credit

and savings patterns.

• To prepare recommendations on scaling up the HMF Program for lower income and

informal sector households, product design and an underwriting guidelines framework for housing microfinance

Summary of Results & Recommendations

• We covered 3 states where IFMR is present in remote rural markets (via KGFS – Kshetriya Grameen

Financial Services), as well as 8 other states via a survey conducted by the Center for Microfinance. We also conducted a field diligence of 6 NGO-MFIs that NHB lends to

• In IFMR’s own retail presence, we see significant demand for housing finance. While we are able to only

provide short tenor money, the end use may be housing (range of 1-35% of loans based on geography / nature of loan)

• Survey of 8 states indicated:
• 70% of the population have an income that exceeds expenditure, however, only 30% of the population,

across all groups, claim to save on a voluntary basis

• Study indicates monthly surplus of c.INR 1,000 on an average
• 90% of households surveyed owned a home, however had significant requirement for housing finance

for home improvement

• Availability of existing housing is the best source of collateral available
• Recommendations:
• Market developmental role to be played by NHB – financial guarantees / credit enhancement for fund

raising by lenders.

• Recommend high quality for-profit MFIs and NGO-MFIs for such a program. NHB will face significant

capacity constraints in scaling this up, and should work with specialised players for due diligence, risk analysis and on-going field monitoring

• The underlying product is largely in the nature of home improvement, to meet the need of the market
• Detailed suggestions provided on an underwriting and monitoring framework for housing microfinance

Primary Survey Data Analysis : Two studies

• KGFS Data across three

states

• Tamil Nadu,
• Odisha,
• Uttarakhand
• Non-KGFS areas

across eight states

• Rajasthan
• Bihar
• Uttar Pradesh
• Maharashtra
• Madhya Pradesh
• Tamil Nadu
• Odisha
• Uttarakhand

Coverage

• 1721 households surveyed from rural and semi-urban areas across 8 states in India
• A survey of lower income and informal sector households across the states. Survey includes states

with operations of KGFS (Kshetriya Gramin Financial Services) - the rural financial services arm of the IFMR Group

• Due diligence of NGO-MFI partners of NHB doing housing microfinance.
• Two Key Studies:

NABARD Data on SHG-Bank Linkage Programme How Households Save and Invest: NCAER Household Survey Secondary Research

KGFS STUDY

Annual Household Income Across KGFS States

• More than 45% of households in Tamil Nadu and Orissa have annual household Income less

than INR 100,000.

• Uttarakhand has a slightly wealthier population and only 38% of households have annual

income less than INR 100,000

• Average Monthly Household Income across states is around INR 12,000
• Average Month Household Expenditure across states is around INR 4,000

<5K 5K-30K 30K-55K 55K-80K 80K- 105K 105K- 130K 130K- 155K 155K- 180K 180K- 205K >205K Tamil Nadu 0.36% 2.88% 8.91% 15.83% 14.83% 13.92% 10.10% 8.63% 4.37% 20.16% Orissa 1.68% 3.71% 10.67% 16.48% 14.61% 11.44% 9.28% 7.75% 4.42% 19.95% Uttarakhand 0.41% 5.03% 8.84% 13.40% 11.05% 10.88% 7.98% 7.20% 5.15% 30.05% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00%

% Households

Dhanei BPL APL Business 16.2% 23.9% Agriculture 20.5% 6.7% Dairy 0.6% 0.9% Labourer 59.0% 58.7% Govt Employee 0.6% 3.6% Private Sector 2.2% 3.4% Shop 1.0% 1.7% Working Abroad 0.1% 1.2% Tamil Nadu BPL APL Business 2.8% 4.5% Agriculture 23.0% 13.3% Dairy 2.0% 1.0% Labourer 65.8% 62.4% Govt Employee 1.7% 2.7% Private Sector 1.8% 4.7% Shop 2.1% 3.2% Working Abroad 0.8% 8.1% Uttarakhand BPL APL Business 3.06% 13.09% Agriculture 47.71% 7.70% Dairy 1.37% 0.58% Labourer 35.55% 22.98% Govt Employee 1.61% 11.21% Private Sector 6.28% 21.79% Shop 4.27% 22.21% Working Abroad 0.16% 0.44% Overall BPL APL Business 5.6% 9.1% Agriculture 29.0% 11.3% Dairy 1.5% 0.9% Labourer 56.4% 54.2% Govt Employee 1.4% 4.5% Private Sector 3.1% 7.8% Shop 2.5% 6.7% Working Abroad 0.5% 5.6%

• Primary source of income in case of most households is wage labour.
• In case of Uttarakhand, salaried income account for primary income of most APL customers.
• Agriculture is the second largest category for BPL

Source and frequency of Income

State and Loan Purpose Jewel Loan JLG Loan Salary Loan Orissa 6% 11% 22% Refurbishment and Repair 5% 10% 21% New Construction and Purchase of homes 2% 1% 1% Tamil Nadu 4% 8% 10% Refurbishment and Repair 4% 7% 10% New Construction and Purchase of homes 0% 1% 0% Uttarakhand 16% 19% 47% Refurbishment and Repair 13% 18% 35% New Construction and Purchase of homes 3% 2% 12%

Utilization of Loans for Housing

• Loan amounts, across all states are larger for new construction and purchase of homes by almost 50%

when compared to loans taken for renovations.

• Average Ticket size of Loans is governed by product features:
• JLG Loan: Min. INR 15,000, MAX INR 25,000, Average INR 16,000
• Salary Loan: Min. INR 5,000, Max 50,000, Average INR 45,000
• Jewel Loan: Min. 500, Max 50,000
• Average varies by state- For Tamil Nadu and Orissa ≈ INR 12,000 and For Uttarakhand ≈ INR

24,000

SURVEY REPORT

Household Income

• The mean monthly income from our sample was INR 6,200

Poor – INR 3,900 Marginal – INR 6,045 Mid-high - INR 9,700

• The lowest mean monthly income was observed in Orissa(INR 2900).
• The highest mean monthly income was observed in Uttarakhand (INR

8000) .

Data was split into three consumption categories relative to the poverty line (PL)as defined by the planning commission

• Rural = 26

INR/capita/day

• Urban=32

INR/capita/day

Survey Report

Household Expenditure

• The mean monthly

expenditure is INR 4,900

• Poor – INR 2,700
• Marginal – INR

5,100

• Mid-high – INR

8,900

• The mid-high income

group consume more than 3 times that of the poor

• The poor spend a

high proportion of their income on food relative to higher wealth brackets

• It appears that the

higher wealth brackets are not transferring the additional income to

• ther observed

expenses

Survey Report

Capacity To Save

54% 35% 6% 0% 5%

SAVINGS

Cash Bank Gold Bonds Property

• 70% of the population have an income

that exceeds expenditure

• However, only 30% of the population,

across all groups, claim to save on a voluntary basis

10000 20000 30000 40000 50000 monthly expenditure 10000 20000 30000 40000 50000 monthly income

• The red line is were income is equal to expenditure
• The blue points below the line represent households

with the potential to save

• Income significantly exceeds expenditure even at low

income levels – Mean income-expenditure balance is similar for all wealth brackets

• Poor = INR 1,220
• Marginal = INR 950
• Mid-high = INR 1,080

Survey Report

Home Ownership

• 90% of the

population own their home

• Mean market

value is INR 306,000

• 10% rent
• Mean monthly

rent is INR 2,900

• Tamil Nadu has a

significantly lower rate of home

• wnership than

the other states (60%)

• Housing for the poor is often acquired in increments
• Home ownership is a poor indicator of the need for housing finance
• Housing finance is needed for home improvement, alleviation of overcrowded

households

• The mid-high income bracket are 7% less likely to own their own home
• Market value of mid-high income homes (INR 544,000) is more than twice that of

those below the poverty line (INR 207,000)

• Existing home ownership is the most promising source of collateral for housing loans

due to high level of ownership and value of the properties

• Land holdings and other property represents another significant asset

Survey Report

Some Conclusions From The Study

• Existing land and home ownership represent a promising source of collateral for loans

– This may depend on ownership titles

• A large proportion of the population has the potential to save

– Expenditure on festivals and functions are the major constraints to saving for the poor

• There is a high demand for household loans

– For poor households this market is mainly being satisfied by the informal sector (i.e. Money lenders and family/friends) – For the wealthy households this market is being satisfied mainly through bank loans

Survey Report

Market Potential For Housing Finance

• From the results of the study, the following aspects have been critically viewed to assess the

market potential for housing finance to low income households.

• Household capacity to avail credit
• Market Demand
• Required loan size
• Affordable EMI
• Scope for formal lending institutions

Survey Report

Capacity To Take a Housing Loan

Housing loans Access Assets Savings Shocks

• Access
• Access to formal credit is

essential

• Assets
• Sufficient form of collateral
• Savings
• Capacity to make frequent

loan repayments

• Shocks
• Reliability of loan

repayments

Market Demand

Market potential for home loan according to income categories

• f households and Rural & Semi

Urban categorisation State wise market potential for home and home improvement loan for the next few years

Loan Size and EMI

Wealth Bracket Poor Marginal Mid High Households who have taken loan for purchasing land/home in the past 5 years (%) 7.2 11.3 13.3 Average amount of loan taken (INR) 68,250 49,375 180,885

• The home loan requirement of the studied households is in the range of INR

50,000 to INR 200,000. (However, this is not an indicator of the total cost of house and land on which the house is built)

• Moreover, the affordability limits of the household to pay a monthly EMI for

these kinds of loans would be around INR 1000 per month as evident from the monthly saving capacity of households

Survey Report

Sources of Loans

21.8 26.1 33.3 3.9 7.9 7.2 0.8 1.1 2.6 34.2 21.2 12.8 37.5 39.4 41 1.9 4.2 3.1

POOR MARGINAL MID-HIGH

LOAN PROVIDERS

Bank MFI Chit Fund Family/Friend Money Lender Other

• Money Lenders are

consistently the biggest loan providers

• MFIs do not capture a large

proportion of the market

• The proportion of bank loans

increases with wealth

• The poor are significantly more

likely to take loans from family and friends

Survey Report

Informal lending is the biggest source of loan to our study households

Huge market opportunities for the formal sector players to venture and double its current market presence

RECOMMENDATIONS

Key Suggestions

Evaluation of MFIs / NGO-MFI partners

• Use underwriting framework suggested in this report to identify high quality MFIs / NGO-
• MFIs. Focus on providing continuous feedback, funding and training support to chosen

partners.

• Strong ongoing monitoring and surveillance backing the feedback processes as outlined in

the report for increasing availability of information.

• NHB to help them build robust processes. Bigger role in training on regularizing land titles

across different states. Product

• Focus on home improvement loans and incremental housing finance. Demand for such

loans would be higher. Scale-up

• NHB to play a market development role.
• Role of the NHB as a guarantee provider/second loss provider instead of/ in addition to a

direct refinancing role.

• Use of NHB’s rating to leverage and raise a much larger quantum of financing from the

banks and the capital markets

Structure Of The Proposed Program

MFI Bank / Capital markets SHG / JLG

Members

Collections Role Origination Collection Identification Monitoring Surveillance Second Loss facility Training Funding to SHG/JLG First loss From MFI Second loss From NHB Funding from Bank / Capital markets Stakeholder MFI IFMR Capital NHB Bank

The above concept can be applied to:

• Bank financing to SHGs via MFIs / NGO-MFIs
• Financing to MFIs via capital markets with credit enhancement

NHB would play a key role via credit enhancement, while IFMR Capital would measure / monitor idiosyncratic risk at the field / entity level through active risk monitoring and analytics

Defined Roles

Institution Role MFI

• Identify, originate and service loans on behalf of Bank under a mix of group

liability and individual lending models.

• Ensure high quality of origination
• Ensure bank repayment as per the specified repayment schedule
• Collect guarantee fee from borrowers to be payable to the NHB.
• To provide first loss of 5-10% of the outstanding at any point of time.

IFMR Capital

• Identify MFIs who can originate and monitor high quality clients for Bank
• Carry out regular surveillance/ monitoring till an agreed period of time.

NHB

• To provide partial second loss guarantees for the portfolio.
• To provide capacity building support to the MFI staff

*** We recommend that the NHB‟s credit support is limited and is available after the first loss is exhausted. This ensures (i) skin-in-the game for the Bank, which improves origination / monitoring quality and (ii) better usage of NHB’s support in facilitating a much larger volume. Bank

• To provide a pre-agreed volume of funding to the MFI to originate housing

loans for the existing MFI customers. Bank Security

• 5-10% of portfolio originated by MFI to be provided as First Loss Default

Protection (FLDP) in the form of a cash collateral to the Bank

• x% of portfolio outstanding to be provided as 2nd loss guarantee by NHB

THANK YOU!