Saturday, December 13, 2008


A little bit about why MHFC was set up. Close to a year ago, the promoters attended a presentation made by the Social Change Division of The Monitor Group ("TMG"), a US consultancy with operations in India. This division - for more info, see - is looking at market based solutions for social problems, and the first issue they decided to focus on was / is urban housing for LIG households, esp in the informal sector. This was very interesting as it represented a different take on the problem. It suggested that the issue could start to be addressed by the market, rather than operate through subsidies. TMG was interested in the whole eco system of affordable housing - but its main focus / idea initially was on the supply side - to get builders to just build smaller and thus make the price point affordable. For eg - instead of building say 500 sq ft houses, currently the low end of the scale, which would end up costing approx Rs 6-8 lakhs in most Tier I city suburbs, TMG suggested that builders could look at constructing 250-300 sq ft flats instead. This would bring the price down to approx Rs 3-5 lakhs. The idea is still being adopted and TMG is working with several builders to impress upon them that even if margins are lower, volumes are assured and if the flats came up quickly, then the return in capital could be quite high. We felt that this was a good idea and sooner or later, builders would be attracted to the sector given the huge unmet demand. However, in our opinion, what was missing from the puzzle was making financing available to the buyers. That is, even if houses were made available, this was not a market segment that currently banks / housing finance companies were interested in - mostly because of perceived credit risk and lack of documentation (esp borrowers from the unorganised sector).

The promoters of MHFC felt otherwise as the general microfinance experience has shown an almost exemplary track record in unsecured loan repayments (over 99% in general in India). Merging this experience with a similar very low NPA record in housing finance, our instinct is that LIG families value their homes so highly that it would be a top priority to pay the mortgage - just like it is for any MIG / HIG Indian family. This of course is an untested theory and we will only know if this is true once we start giving out loans. But to cut a long story short, we set up MHFC in May 2008, and applied in June for the required license from the regulator, the National Housing Bank ("NHB"). Given the NHB and the RBI's strong focus on financial inclusion, we expect this license to be issued shortly. However, in parallel, we are setting up the back office, credit model, legal systems, etc - and we expect to start disbursing loans by April 2009. We will be developer led - that is, we will lend only on specific projects - after first confirming that units are aimed at a similar target population (price point typically less than Rs 5 lakhs) and after completing due diligence on the land titles and permissions to build. Projects are not easy to find but given the slowdown in the real estate market currently, and general emphasis on LIG segments (with new financing sops being given by the RBI), hopefully this will change.

No comments: