India: Tiny Loans for Tiny Homes

Jan 2014
India, January, 04 2014 - While the housing loans don’t generate income for the borrower in the way a micro business would, they are just as crucial for low-income families seeking upward mobility.

From what began as a small experiment helping slum dwellers buy homes in Mumbai, Micro Housing Finance Corporation Ltd. has grown into a multi-million dollar business making loans across the country.

The Mumbai-based company, which gives low-income households loans to buy homes, now operates in more than 15 cities, with Coimbatore, in the southern state of Tamil Nadu, being the most recent addition just last month.

“Housing finance companies focus on serving the top 3% to 5% of the population because it’s easier and cheaper,” to give big loans to rich people, said Madhusudhan Menon, chairman of Micro Housing Finance. “No one wants [low income] customers who don’t have documentation of their income.”

The lack of home loans to those most in need of them is one of the main reasons more than 90% of India’s acute housing shortage of around 19 million units falls on the urban poor, according to a report released by real-estate consultancy Jones Lang LaSalle.

For most of the urban poor, owning an apartment with reliable electricity or even a water connection is out of reach even if they have a regular income because banks refuse to give the poor housing loans.

More than 41% of the population of the megacity of Mumbai lives in slums, defined as residential areas unfit for human habitation due to dilapidation, over-crowding, poor ventilation and lack of sanitation facilities, according to government estimates. That figure could be brought down sharply if builders constructed affordable housing for the city’s hardworking poor and housing finance companies gave them long-term home loans.

Mumbai fish seller Raju Mallapa Chavhan is one of the people about to borrow his way out of the slums.

Today he lives in a sprawling coastal shantytown called Machimaar Nagar, in the shadows of the swish residential towers of Mumbai’s Cuffe Parade, a neighborhood full of million-dollar condominiums.

He, his wife and three of his daughters share a 175-square-foot home at the end of a narrow alley clogged with heaps of garbage and abandoned fishing boats.

The 20,000 rupees ($322) a month he makes selling fish doesn’t qualify him for a bank loan so he took a 976,000 rupee ($15,728) loan from Micro Housing Finance last year to pay for a flat in the suburbs with more than four times the space.

“This is an investment for when my daughters grow up,” he said.

Microfinance institutions typically give poor entrepreneurs loans of less than 5,000 rupees ($80) to start small businesses. Micro mortgages are much larger loans, usually between 100,000 rupees ($1,612) and one million rupees ($16,117).

While the housing loans don’t generate income for the borrower in the way a micro business would, they are just as crucial for low-income families seeking upward mobility. The loans give the families a financial asset as well as a sense of ownership and also protect them from rising rents.

MHFC says it is serving a particular type of low-income customer who actually makes money, but just can’t prove it in a way most banks would accept. Its clients can afford homes but they can’t get loans from a typical lender, said Mr. Menon.

As there is rarely a paper trail of pay slips or credit card payment histories to use to rate potential borrowers, MHFC assesses them through interviews with the applicant, employers and others who work in the same industry.

Its officers now know the average incomes of a typical taxi driver, vegetable seller or even a bamboo straightener, said Mr. Menon.

“MHFC is not concerned about exactly how much a customer makes or what documents he has to prove it,” he said.  “A general awareness of whether he can afford the house or not is enough.”

The company has disbursed almost 5,000 loans since it was founded in 2008, but has not had a single defaulter, said Mr. Menon.

As MHFC has proven you can bank on the poor to pay back home loans, an increasing number of lenders, including Dewan Housing Finance Corporation Ltd., Muthoot Housing and Infrastructure and Gruh Finance Ltd. are dabbling in the micro-mortgage business.

Mr. Chavhan’s wife, Jyoti Raju Chavhan, points out that their new home will not only be a better living space, away from the smell of fish and feces which permeates Machimaar Nagar, but also an insurance policy that will ensure her daughters will always have a roof over their heads.

“What if something happens to us, what if I fall down, get hurt, and can’t work anymore?” said Ms. Chavhan who works with her husband at a fish market. “This house is for our daughter’s future.”


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