Author: Avishek Gupta

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.)

The Indian policymakers and regulators have been fairly active in ensuring that through a mix of adequate policies and regulatory measures there is the right kind of stimulus to keep the housing finance market growing in India. In fact, with the expansion of housing finance institutions and regulatory and fiscal support, mortgage interest rates have come down from 16% in the mid 1990’s to 9% in the early part of the last decade, especially for the middle and higher income segments. The mortgage industry has consistently grown at an average rate of 40% annually. Increased availability of affordable housing finance has resulted in home ownership amongst a much younger group of citizens. Studies reveal that the average age of a house owner has come down by twenty years in the last decade. However, this phenomenon has been limited to the middle class and high income segment of the country and the lower income groups and economically weaker sections have remained almost completely out of this growth story.

High Quality Origination: The households falling under low income and economically weaker sections category, especially from the informal sector have little or no means to access finance from an organised channel. The current structure and processes within large housing finance companies and banks do not permit them to lend to these segments primarily due to lack of evidence of income. Recently, a number of specialised housing finance companies have come up that are catering to the housing finance needs of the economically weaker sections and lower income informal segment households. Such housing finance companies have developed well defined processes that help them to evaluate the informal sector customer. This is something that banks and large HFCs find difficult to do. Such new and specialised originators are fairly small in size but are growing at a rapid pace. They understand the real cash flows and risks faced by the low income or informal sector borrower and have better capability to underwrite the loans given to an informal sector customer. This is a good sign and more such institutions need to be promoted on the ground.

Risk Aggregation and Orderly Risk Transfer: While these specialised housing finance companies have developed expertise in evaluating the low income informal sector customer, what many of them  lack is the balance sheet strength to hold on to the risk, especially since housing loans are also of longer tenor.  There is also a great need to diversify funding sources for each of these originators to reduce the shocks that these companies might face due to drying up of limited sources of funding. There is significant opportunity in this space for larger financial institutions to activate triggering the growth of smaller financial institutions by lending to the smaller HFCs or participating directly in the process of lending to the lower income and informal segment borrowers through adequate risk sharing mechanisms with the small HFC. In addition, off balance sheet structures like securitisation need to be considered for a well-rounded risk management strategy for such small entities. It is essential that there is regular and orderly flow of assets from these high quality specialised originators to larger debt capital market investors who have the capacity to hold on to risk and have long-dated liabilities, thus enabling the smaller specialised originators to reach out to more and more borrowers in the informal and low income segment.  Strengthening the domestic debt capital markets through participation of institutions/investors such as insurance companies and mutual funds in mortgage-backed securities will go a long way in complementing the efforts of domestic commercial banks.

NHB has an important role to play in the development of these markets and may wish to explore further its role as a market maker of these securities and loans, act as a second-loss provider or guarantee provider for bonds of smaller lower rated but high quality originators to add to its role as a direct lender and re-financier. Significant work also needs to be done on rationalising the legal framework around mortgage backed transactions to permit more cost efficient and flexible structures. The legal framework around mortgages has held back the development of mortgage backed securitisation market in India. This has to be altered to lead to a more conducive environment.