India: Expanding Housing Finance Market to Lower-Middle Urban And Rural Income Segments

The need to stimulate the housing market in India was identified in 2006, when the National Housing Bank requested TA from FIRST to explore ways to get the private sector to serve sizeable segments of low-income urban households on a purely commercial basis. Though mortgage lending had grown very rapidly in India, it was restricted mainly to middle- and higher-income groups and was not reaching most of the lower-income and poor groups, which constitute over 80 percent of the urban population.

The objective of FIRST’s TA project was to assess the feasibility of and conditions for providing market-based financial solutions for housing for segments of the population in both urban and rural contexts, that are currently not served by banks or housing finance companies. These segments include groups active in the informal sector. This involved assessing how to overcome key obstacles, including (i) difficulties in measuring borrowers’ creditworthiness (especially those employed in the informal sector), (ii) increased vulnerability of borrowers to interest rate fluctuations and (iii) the higher transaction costs of small loans.

Project outputs included in-depth market research on the demand and supply sides to understand customers’ requirements and the constraints faced by financial institutions and developers. Conditions were identified for triggering interest by market players in offering housing finance to moderate to low-income households. Business models were proposed and product development options detailed that addressed noted issues and challenges; and pilot projects were designed to test the most innovative and critical options.

The project was very timely and had an impact even before the pilots and the formal dissemination actions were completed. Its implementation coincided with changes in the government of India’s policy, which included institutional rearrangements of the Housing Ministry and the launch of an “Affordable Housing for All” initiative, the objectives of which were similar to the goals of this project. The FIRST team was consulted by the government, and project findings were presented at several high-level events. A growing interest was identified among market players, evidenced by numerous applications for participating in the pilot projects, and new entities were set up to specialize in low-income mortgage lending. Although these very positive developments cannot be attributed solely to the FIRST project, it definitely contributed to creating awareness of these needs through multiple contacts with professionals and the assessment of market potential.

Moreover, FIRST committed additional resources in a follow-up effort throughout 2011 to test more business models for a larger number of underserved segments. The tests involved a larger than anticipated number of stakeholders—over 30 potential market participants, including large employers, housing finance companies, banks, NBFIs, developers, and government bodies.

The World Bank used the assessment and recommendations from the FIRST project as input in developing a large-scale initiative—a $300 million project targeting low-income housing, to be approved in April 2012. Although it is too early to know the ultimate impact of the FIRST project, indicators of success that could be followed up in the near term would be the number of housing finance loans extended under the pilot project as well whether the pilot structure was replicated by other players in the housing sector or in other geographic areas.