In addition to the points discussed in the earlier post, there are a few other key elements that go a long way in ensuring access to finance. Two major aspects are discussed in this last post of this series.
Credit Infrastructure: In addition to the above, comprehensive credit information systems, reliable information on house transactions and prices and mortgage registries improve transparency in the process of credit evaluation for housing loans and thereby improve the ability of housing finance companies to build a less risky portfolio. Interestingly, a lot of work has been done in these spaces over the last couple of years. Significant growth in borrower information in credit bureau databases and mortgage registries like CERSAI as well as measures like the RESIDEX are great beginnings.
Customer Protection: While all of the above are important in increasing the flow of credit to the lower income or informal sector households, an associated issue is that of customer protection. A robust financial architecture is built on strong customer protection norms and this can be achieved only if the originator is directly liable for the appropriateness of the financial product being sold by them to their customer. This becomes all the more important in the case of the informal sector and lower income borrower because the cash flows and risks faced by such a borrower are very different from a standard salaried home loan customer.
At this point of time, all of us in the financial sector need to take a hard look at the issue of customer protection and frame appropriate guidelines for the same. Regulators are best placed to initiate such measures which look at a shift from the conventional financial literacy and disclosure based approaches of customer protection to a more involved engagement of the originators, where they take responsibility for ensuring the right housing finance product is offered to each class of customer.
(While thoughts are mine, I can’t deny that a lot of these thoughts have been shaped by the organisation I work for. I owe a lot of the thinking to IFMR Trust. IFMR Trust does extensive work in the access to finance space and has built several high quality institutions that enable access to finance.)