Key to India’s booming affordable home lending market: Patient capital

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Key to India’s booming affordable home lending market: Patient capital

Two decades ago, it was nearly impossible for a low-income family in India to get a loan to buy a home. Now, mortgages for affordable homes is one of the fastest-growing financial service sectors in the country. 

Early bets by Lok Capital, Elevar Equity, Caspian, and others have played a central role in that shift. Impact fund managers spotted the enormous opportunity to lend to India’s financially excluded households and backed companies with new approaches to reaching and underwriting loans for a new class of borrowers. 

Many of those bets have since paid off: a string of exits and IPOs in the low-income mortgage sector has catalyzed interest and engagement from commercial investors and large financial institutions. 

Low-income mortgages are today estimated at about 1.4 trillion rupees ($15.8 billion). They could nearly double by 2028. 

“We haven’t solved for affordable housing in India yet,” says TT Venkatraghavan of Chennai-based Lok Capital. The firm in 2014 made a string of investments in low-cost mortgage lending, including Ummeed Housing Finance, Sewa Grih Rin and Aptus Housing Finance. It has since exited them all. 

Lok is now looking for opportunities to move further downmarket, and deepen its impact, in smaller cities and towns or through lenders that are finding new ways to integrate technology in the mortgage lending process. For example, it has invested in companies that are moving into micro and small business lending, with home-ownership as collateral.

Venkatraghavan believes unmet demand could be $250 billion or more. 

“There is always the opportunity for an impact investor to push the boundary,” he says.

Opportunity spotting

Driving demand for affordable home ownership in India is an influx of people into cities from rural areas. Around 500 million people, or 35% of the population, now live in an urban center. India needs at least 30 million new homes for lower and middle-income households by 2030. 

Sanjay Chaturvedi was among the early group of entrepreneurs to spot the opportunity to help newly urban, low-income households become homeowners. He launched his firm, Shubham Housing Development Finance Company, in 2011 to lend to households with monthly incomes of about 40,000 rupees ($435). Shubham’s early mortgages averaged around 550,000 rupees ($6,000). Its typical borrowers were self-employed people, tradesmen and informal workers, like drivers or maids.

“They were shocked” to be approached as potential customers by a mortgage lender, Chaturvedi recalls. “There are a whole lot of people in this country who have a steady income, but who don’t have a piece of paper to evidence it. These are the people we set out to serve.”

A few peer companies, often led by ex-bankers, sprung up in the early 2010s to cater to this market. Shubham, based in Gurgaon, near Delhi, drew the attention, and backing, of Bangalore-based impact investment firm Elevar Equity in 2012. 

A decade after its investment, Elevar exited its stake in Shubham to two growth-stage impact investors: LeapFrog Investments and Premji Invest. 

Shubham has offered mortgages to 100,000 households in 13 states of India. Chaturvedi says there is such high demand that he anticipates more than 30% annual growth in the firm’s lending activity.

“There are no ceilings,” he says. “There’s a huge demand for formal housing in this segment.”

Patient capital

A growing number of low-income mortgage lenders, including Aavas Financiers, Aadhar Housing Finance, Aptus Value Housing Finance India and India Shelter Finance, have ridden the wave of the market all the way to public listings. A patient investment timeline like Lok’s and Elevar’s has been necessary to the market’s successful growth. 

“It took the first 10 years of this sub-sector having started to establish what works and what doesn’t work,” observes Mona Kachhwaha, a long-time impact investor who has worked for Caspian and now UC Impower. At Caspian, Kacchwaha was part of the team investing in low-income mortgage lenders like Aptus Value Housing Finance, which went public in 2021. It took the five to seven years for the industry just “to prove that it’s a bankable model,” Kachhwaha says.

Early challenges in the sector included figuring out how to determine borrowers’ ability to repay, since most lenders were serving first-time borrowers informal and variable incomes. 

Another was the loose nature of real estate ownership in many parts of India. In small towns, and even urban and semi-urban pockets, land titles aren’t clear or don’t exist at all. Lenders would often have to take on the responsibility of getting properties registered and formally titled. 

Many early lenders had steep learning curves on their sales and distribution strategy for this new class of borrowers as well. 

Data on low-income home mortgages today show good performance among existing lenders. Non-performing loans from the last three years are below 1.3%. 

Shubham, for example, grew its business with careful underwriting and modest loan-to-home-value ratios. It typically lends at just 50% to 55% of a home value. Its average loan size today is about $11,000 for a home valued at about $22,000. That’s on par with the industry average, according to the credit rating agency ICRA Limited. 

Fuel for growth

The traditional, commercially-minded investors and financial services firms piling into the low-income mortgage market include Singapore-based private equity firm Growtheum Capital Partners, which in January invested five billion rupees ($54 million) in Wonder Home Finance. 

PNB Housing Finance, part of state-run bank Punjab National Bank, is planning to scale up its “affordable and emerging market” home loans, “given their strong underlying demand and long-term growth potential,” its CEO Ajay Kumar Shukla said on a recent earnings call. Such loans currently make up 39% of its total retail loan portfolio, he noted. 

In December, the International Finance Corp. pledged to invest up to three billion rupees in residential mortgage-backed securities issued by Grihum Housing Finance, an affordable housing financier owned by private equity firm TPG.

Recent progress in financial inclusion, technological advancements and government initiatives are accelerating the market’s growth. The government, for example, offers interest subsidies on home loans of up to 600,000 rupees, which has raised mortgage awareness among prospective borrowers. 

Millions of Indians in the informal sector have also opened bank accounts in the past decade. Account aggregators can now collate and share aggregate information about an individual’s banking habits (with his or her consent). 

“This is gold for me as a lender,” says Kachhwaha of UC Impower. 

The firm in September invested in Unico Housing Finance, alongside alternative asset manager Anicut Capital. Unico’s $13 million round will support more lending to first-time homebuyers and to households in smaller towns. 

New financial technologies and the increasingly widespread and low-cost availability of smartphones has helped make the lending process faster and cheaper.

For instance, many loans finance self-construction of new homes. They’re typically disbursed in tranches as construction progresses. The first disbursal may require a physical inspection, but subsequent tranches can now be approved through video calls and geo-tagging.

“Technology has really changed the time to market and customer experiences,” says Shubham’s Chaturvedi.

Responsible acceleration

The risk with rapid acceleration of credit, of course, is a replay of the overindebtedness and defaults that played out in the microfinance industry in the early 2000s. 

Today, low-income mortgage risks are well mitigated with conservative loan to value ratios and interest rates that are higher than “prime” mortgages, said ICRA Limited’s AM Karthik in July market survey. “Sustained stability in operations and prudence in credit policies would be crucial for operating at a larger scale.”

Impact investors have a role to play in supporting responsible lending practices and standards as more companies enter the affordable housing mortgage market, says Lok’s Venkatraghavan. “You need to balance the impact with the commercial sense.”

Over-indebtedness among borrowers is something Lok watches closely when choosing a company to back. The firm hasn’t made any new investments in the sector recently, but Venkatraghavan is optimistic. 

“A house continues to be the single largest multiplier in terms of social security and incomes,” he says. “Its about being able to find the right team and the right asset.”


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