Despite strong growth in in disbursal of housing loans in the country in the last few decades, India’s housing finance sector has remained relatively underpenetrated compared to its peers as evident by its low mortgage-to-GDP ratio (9% as on March 2015), compared to its regional peers (17% for Thailand, 20% for China, 34% of Malaysia).
The recent announcement by the government of India to boost mass housing in peripheral areas with attractive interest subventions and increase in the number of homes in rural areas is a welcome move, particularly for the segment at the bottom of the pyramid, where growth and potential exists.
The trend of rural-urban migration is set to continue aligning to estimates that until 2050 urbanisation is likely to grow at a CAGR of 2.1%—double that of China. The government’s announcement is a timely acknowledgment of the inherent potential of the industry as well as strong steps to achieve its ‘Housing For All’ objective. This, together with the Credit Guarantee for SMEs, will enable small business owners and the middle class salaried customer to make better progress in their businesses, take a step towards higher aspirations and seek to move into their own houses.
The potential for housing finance is tremendous supported by economic growth drivers such as population expansion, rising disposable incomes, personal income tax benefits, increasing urbanisation, and economic growth of tier II and tier II cities. As times transform and India gets online, the sector is also quickly adapting, moving in a positive direction and taking new steps with a perk up in the interest of small-finance banks and micro-lenders in this field. Also, the online success of start-ups in their attempt to bring genuine buyers in contact with the best of loan options in the market, have helped in expanding home finance demand and the needs of younger borrowers.
The shortage in the low income housing category is evident both in terms of quality and quantity, and about 96% of this is composed of EWS and LIGs. The government’s announcement has given further impetus to the transformation of the sector and is a great step to empower people to invest in their dream homes.
Overall, the sector outlook remains positive, with several positive supply side initiatives underway through the Pradhan Mantri Awaas Yojana, which proposes housing for all by 2022, by building two crore houses for urban poor including LIG and EWS households, and the Real Estate (Regulation and Development) Act 2016, to enhance transparency and boost confidence of home buyers.
As a country, we have made some constructive moves on the lending side as well, with the increase of threshold limits for what can be considered as affordable housing and also for loans to be considered as priority sector lending. The RBI’s decision to increase loan-to-value (LTV) ratio will also enable housing finance companies to lend more to lower middle income customers. Thus for specialised housing finance institutions, a huge market awaits players who have developed a sustainable business model in extending credit to those at the bottom of the pyramid and are consistently expanding their reach to unbanked areas.
The recent currency purge initiative is expected to trigger a rise in demand for formal credit. The associated technology transition is also expected to boost the ability of housing finance institutions to lend credit through shorter and friendly processes to assess eligibility and faster underwriting. With several benefits associated, advantages of digital documents and fewer intermediaries, cost of finance is expected to come down, which can be passed onto the customer.
New age technologies and innovation will also play a key role in defining the future of the housing finance segment, thereby giving the sector the impetus to reach a larger set of customers. Embracing interactive technologies (mobile apps, social media, geo-localisation software) will not only help in market segmentation and expansion, but also help in reaching out to customers with tailored products according to their financial needs.