In the last two years, the private sector has pumped in about Rs 1,500 crore in rural housing. This is almost 20 per cent of the revised estimate of Rs 8,121 crore that the government spent on its rural housing scheme Indira Awas Yojana in FY 13 and plans to spend in FY 14.
The crucial difference in the market is the ticket size and the collateral offered. Unlike towns, banks and housing finance companies offer money for part improvement or construction of homes to keep the repayment load on the borrowers manageable. Also, while land is used as collateral, the banks have found it is best not to possess it as this creates a scare in the market, driving away potential consumers.
"Even though we get land as collateral, I don't think we look at it for repossession. It's an issue of sentiment because it is the only asset he (the borrower) owns," explained Ramesh Iyer, MD of Mahindra Finance.
Over the last few years, leading finance companies have set up rural housing companies and offered loans to farmers with agricultural or other allied income. Mahindra Rural Housing Finance Ltd (MRHFL), where Mahindra Finance holds 87.5 per cent stake and National Housing Bank holds 12.5 per cent, started its operations three years ago. Having expanded its reach to seven states, the company now has a loan book of Rs 1,000 crore which stood at Rs 330 crore a year ago.
"Currently the book size of MRHFL is Rs 1,000 crore and we are doubling it every year. The potential is unimaginably large and we feel that by 2015 the book will grow to up to Rs 5,000 crore and we will increase our presence across 12 states," said Iyer.
HDFC Ltd, a leading player in the housing finance business, also formed a rural housing division two years ago to focus on these markets.
Two year ago, DHFL Group launched a company, Aadhar Housing Finance Ltd (AHFL), in joint venture with IFC to focus on the rural market. The company has seen its loan book grow to around Rs 400 crore over the last two years.
"The growth in the segment is around 15-20 per cent and there is a big opportunity in the rural segment to grow," said Rakesh Makkar, president and CDO, DHFL.
The customers in this market generally seek loans for home improvement, additional room construction or for converting kutcha houses into pucca houses. However, MRHFL said it is not easy to get in this market as people in villages generally take loans for livelihood products (like tractors, MUVs etc) and avoid home loans or loans for buying consumer durables. Bankers feel there is also a stigma attached to taking a home loan in villages and they are worried that their land may be taken by the financier if they fail to repay.
"When we went with our housing product, they were not very excited as they generally use their surplus to construct houses and are worried about whether the lender is looking to grab the land," said Iyer, who offers loan between Rs 75,000 and Rs 1.5 lakh to individuals in rural areas and has already provided loans to over 1.5 lakh customers.
"While Mahindra Finance took around 15 years to build a book of Rs 30,000 crore, this business has the potential to do that in half the time," he added.
But the opportunity does not come without challenges and concerns. Housing finance companies are practising caution on the quality of the asset they build as loans may turn bad if there is a bad monsoon in a year.
"Some of the concerns in this market are: there is no uniform approval process, title issues of land, inheritance issues and also high transaction cost for these loans," said Makkar.
But that is not stopping these companies from going to this developing market. "I think it is a very large unique opportunity, which can grow bigger," said Iyer.