India: Access To Housing Finance for Women in Lower-Income Groups
Introduction:
The Asian Development Bank’s (ADB) longer-tenor debt for housing finance for women, so they can borrows in economically weaker sections (EWS) and low-income groups (LIGs). At least 75% of the debt proceeds will be on lent to borrowers in select lagging states of India.
Affordable Housing and Housing Finance:
Limited housing supply adversely affects the living conditions of lower-income households, especially in large cities characterized by low building standards. The shortage of housing units in India is estimated at 18.7 million in urban areas and 43.7 million in rural areas. More than 90% of this deficit is estimated to be in the affordable housing segment.
The Government of India launched the Pradhan Mantri Awas Yojana (PMAY) initiative in 2015, with a target of building 20 million affordable homes for the urban poor, including the EWS and LIG categories, by 2022. To date, about 8.4 million homes have been authorized. Under the PMAY, the government offers interest rate subsidies of 3.0%–6.5%, depending on the loan amount and the income category of the borrower, and other measures to incentivize the supply of affordable housing.
Finance sector overview:
Banks dominate the finance sector, with the assets of commercial banks totaling 75.0% of financial system assets. Public sector banks (PSBs) have 65.8% of all banking assets, but are facing tighter capital constraints with an average leverage ratio of 5.9%. Gross nonperforming assets (NPAs) for the banking system declined to 9.3% in fiscal year (FY) 2019 from 11.5% in FY2018 and 9.6% in FY2017. The NPAs of private sector banks (3.7%) and nonbank financial companies (NBFCs, 6.6%) reflected better performance than that of PSBs (NPAs of 12.6%) in FY2019. NBFCs serve segments that typically are not catered to by banks. The Reserve Bank of India (RBI) had 9,659 NBFCs registered in FY2019.
Housing finance sector:
Given borrowers’ constrained access to credit and the limited availability of long-term funds for financial institutions offering home loans, mortgage penetration in India was only 10.0% in FY2018—much lower than in other emerging markets such as the People’s Republic of China (18.0%), Thailand (20.0%), and Malaysia (34.0%). Most commercial banks provide mortgage lending, but the affordable housing segment has not been a primary target as banks have concentrated on salaried employees in urban areas. HFCs are a significant player in mortgage financing, representing a 37.0% market share. Regulated by the RBI, the HFCs are solely mandated to fund housing.
Underserved home loan borrower segments:
Lower-income households are particularly constrained in obtaining mortgages because of the lack of documents to prove their income source, high credit evaluation costs, and perceived higher credit risk. As a result, such households typically fund their homes through savings, borrowings from family and friends, or loans from local moneylenders at usurious interest rates. Women in this income group find it particularly difficult to obtain mortgage loans to meet their housing needs, as men dominate land and home ownership.
Business strategy:
Since its foundation, Aavas has become the largest HFC in the affordable housing segment holding ₹59.4 billion in AUM (FY2019) with a market share of 6.8%.21 Aavas will continue to focus on non-salaried lower income customers, penetrating deeper into the 10 states with existing operations, especially in districts with low mortgage penetration. From its base in Rajasthan, Aavas has gradually expanded into the adjacent states of Gujarat, Maharashtra, Madhya Pradesh, Delhi, Haryana, Uttar Pradesh, Chhattisgarh, and Uttarakhand. The company will continue to focus on home loans and self-construction home loans, with a cap of 25.0% on loans for non-housing purposes.
Governance structure:
Aavas’ board has nine members, including three independent directors, five nominee directors, and the chief executive officer. The chair of the board is an independent director. The board members have experience across the financial services sector, including with large PSBs, private equity firms, and commercial banks. The audit committee has a majority of independent directors and the nomination and remuneration committees have equal number of independent and non-executive nominee directors. Aavas’ statutory auditor is S. R. Batliboi & Associates, an EY associate.
Conclusion:
Aavas has an established E&S policy. The chief risk officer is responsible for E&S matters, while the company secretary receives and responds to complaints from the public or civil society organizations. Engineers conduct site visits and prepare valuation reports describing the conditions in which the property is situated and the market value, based on prevailing market rates. Aavas has adopted the exclusion list of the International Finance Corporation. Internal trainings on E&S are being provided by Aavas to all relevant staff, and compliance with E&S is also reported in the annual monitoring report as part of its requirements to the CDC Group plc.
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