Studdy con

nducteed by  IFMR  Capittal in 

par tnersh
hip wiith thee Natiional HHousinng Bank 
and
d Depa artmen nt for  Inter nation
nal 
Devvelopmment  

 
EXECUTIVE SUMMARY
• Housing is a basic need and is known tocontribute to the social, physical and psychological
wellbeing of the communities. Besides providing shelter and security, it also enables easy
access to the credit by working as collateral comfort / security. Overall, good quality housing
has a long term impact on the productivity of individuals and hence growth of the economy as
a whole.

• Housing shortage has always been a major problem over the years. The total housing
shortage in rural areas is 43.67 million units and 18.78 million units in urban areas. It is
important to mention here that most of the shortage can be attributed to the lower income and
informal sector households.As an initiative to understand the housing microfinance space
better, and develop solutions to address this vast gap, the National Housing Bank (“NHB”)
had developed a program to partner with non-profit microfinance institutions (“NGO-MFIs”)
that in turn would utilize the financing to provide housing loans to its customer base.

• A study on housing microfinance was commissioned by the NHB and the Department for
International Development (“DFID”) with the following objectives

1. To evaluate the performance of the housing microfinance program (HMF) initiated by the
NHB

2. To conduct a representative study across rural and urban poor and ascertain credit and
savings patterns and other relevant information for product design

3. To prepare recommendations on scaling up the HMF Program for lower income and
informal sector households, product design and an underwriting guidelines framework for
housing microfinance

• The NHB and DFID selected IFMR Capital Finance Private Limited (“IFMR Capital”) to
conduct the study. The study covered the states of Tamil Nadu, Uttarakhand, Odisha,
Madhya Pradesh, Bihar, West Bengal, Uttar Pradesh, Karnataka, Rajasthan and Maharashtra
and covered multiple NGO-MFI partners and existing and potential housing microfinance
clients across different economic and social strata.

• A brief summary of the recommendations of the study is presented below:

Underwriting Guidelines

• The report includes detailed underwriting guidelines for evaluation of housing

microfinance NGO-MFI partners. These underwriting guidelines cover the following
aspects: (A) Management, governance and organisation, (B) Systems, origination, credit
& collection processes, and technology and (C) Financials and portfolio quality

• Given that this is a high-touch consumer finance business, with significant operational,
cash management and fraud risk, it is absolutely necessary to have strong monitoring
process focused on identifying areas of improvement and suggesting best practices to
each entity on a quarterly basis.

Scale Up

• The findings and suggested processes from the reportcan be used by banks to evaluate
NGO-MFIs to build partnerships for JLG/ SHG Bank Linkage. Based on the agreed
framework, the NHB can, together with bank, initiate a dependable funding channel tied
to covenants which push the entities to improve upon the existing operations.

• It is recommended that the NHB starts working with a small number of NGO-MFIs to
begin with. This will ensure that a handful of good quality NGO-MFIs are chosen to

1
 partner with banks. By increasing the share of funding for Housing Microfinance enabled
by banks in these institutions, the NGOs would take up the housing microfinance program
more seriously and invest time and resources. The NHB will also be able to have greater
focus and control on the smaller base to permit a rapid scale up in future.

• While the banks do carry out regular and rigorous inspection processes, the approach
has to be data driven and forward looking with active engagement with the NGOs and
helping them improve their operations. Key areas of improvement include improving the
granularity of data collection, improved efficiency of operations and credit appraisal
processes that go beyond group lending. If the NHB, along with banks, is able to
concentrate its efforts and funding lines on a smaller number of NGO-MFIs, it would be in
a better position to encourage the NGO-MFIs to take up Housing Microfinance seriously.
The NHB can also support smaller number of NGO-MFIs with better training support and
then as MFIs build capabilities, the NHB can focus on the next set of NGO-MFIs.

Product Design

• The lessons learnt and insights gained from the study reveals that about 30 % of low
income households have regular income stream that can pay off a monthly amortising
housing loan. It is also seen that the requirement of home improvement loan would be
more than that of the home loan requirement.

• The required loan size for would be in the range of INR 50,000 to INR 200,000 with an
affordable EMI of around INR 1000. Given the current low penetration of formal financing
in the segment, there is scope for formal credit institutions to expand their existing market
share multi-fold.

• While a significant market remains to be addressed by formal financial institutions, one of

the key obstacles faced by financial institutions is lack of title documents.

• Significant support from NHB would be required to train the NGO-MFI staff on helping
their clients in formalizing their land titles during the course of the loan disbursal
process.In terms of product design, given that while some households do have savings in
banks, most households save in the form of cash. The lack of land titles will require NGO-
MFIs to build products which can use paralegal documents for creation of security for
lower ticket sized loans or dependupon alternate sources of security like vehicles, where
available.

Wholesale Financing

• In order to enable continuous and dependable flow of finance for wholesale financing of
housing microfinance, the funding model proposed in this study is based on the principles
of incentive alignment and active risk management.

• It is imperative that for the purpose of ensuring an efficient system design for housing
microfinance. A structure is built where there is first loss provision from the originator MFI.

• In order to facilitate confidence amongst banks to lend through the MFIs, a structure
where NHB provides a second loss protection in the form of a guarantee is much
required. The idea is to partner with a forward looking bank and demonstrate a model of
funding which can then be replicated in future by other guarantee agencies partly
replacing the NHB in its role as the second loss provider in the structure.

Role of the NHB

• Further, the NHB should proactively work towards developing sound financing structures
to support the program. Providing second loss guarantees that add an additional line of

2
 protection for participating banks, would incentivise banks to participate in such a
program, while at the same time ensuring that the banks retain risk over and above the
first loss provided by the NGO-MFI and second loss from the NHB

• NHB should also consider continuing its focus on capacity building specifically targeting
NGO-MFIs for this purpose. Assistance in the form of imparting skills required for
originating housing loans as a departure from the conventional group liability product
would be key in ensuring that the NGO-MFI originates high quality loans.

• The NHB has to play a role in training staff on institutionalizing the process of
formalizing land titles. This would not only have a widespread impact on the land
rights of the lower income households but would also unlock a huge market which
currently is served by the informal sources of finance. In addition, the housing finance
companies will have a larger market of properties with good title to finance

• The NHB has a large mandateand may not be able to keep a strong operational control
on a widespread program. NHB may not have sufficient bandwidth for a program with
such deep penetration. It may consider the role of piloting and demonstrating the model
suggested above so that it can be replicated by others.

• There is a clear need for institutions which can keep a direct tab on the NGO-MFI
partners and push improvement. In scaling up the housing microfinance program, NHB
can consider partnering with market participants, such that NHB plays the role of a
facilitator and enabler.

• IFMR Capital works with a large number of banks and understands the interests and
bandwidth of different banks to implement a SHG/JLG Bank/HFC linkage program for
housing microfinance. IFMR Capital can play an active role in implementing the pilot
and scale-up.

• IFMR Capital has a strong risk and monitoring team. IFMR Capitalcan play an active role
in monitoring the operations of the program and also providing a risk analytics support to
banks and other investors.

3
List of abbreviation
APL Above Poverty Line
BPL Below Poverty Line
CH Chattisgarh
CMF Center For Micro Finance
DFID Department for International Development
EWS Economically Weaker Section
GDP Gross Domestic Product
HH Household
HMF Housing Micro Finance
IFMR Institute for Financial Management and Research
INR Indian Rupees
KGFS Kshetriya Gramin Financial Services
LIG Low Income Group
MFI Micro Finance Institution
MHUPA Ministry of Housing and Urban Poverty Alleviation
MIS Management Information System
MP Madhya Pradesh
NABARD National Bank for Agriculture and Rural Development
NCAER National Council of Applied Economic Research
NHB National Housing Bank
NPA Non-Performing Assets
NREGA National Rural Employment Guarantee Act
NSSO National Sample Survey Organisation
SHG Self Help Group
UK Uttarakhand
UP Uttar Pradesh

4
Contents 
EXECUTIVE SUMMARY ........................................................................................... 1 
List of abbreviation .................................................................................................. 4 
1.  Introduction ..................................................................................................... 8 
2.  Background ..................................................................................................... 9 
Urban Housing Shortage: ....................................................................................... 9 
Rural Housing Shortage: ...................................................................................... 10 
Housing for urban residents: .................................................................................. 10 
Housing for Rural residents: .................................................................................. 10 
Favourable Developments: ................................................................................... 11 
3.  Introduction to the Project .................................................................................. 11 
Evaluation of the NHB’s Housing Microfinance Program ................................................. 12 
Study of Savings Pattern and Credit Behaviour of Informal Segment Households and Understand
the Potential of Housing Micro Finance ..................................................................... 12 
Model for scaling up access to housing finance for lower income and informal sector households 13
Evaluation of NHB's Housing Microfinance Program 

1.  Introduction ................................................................................................... 15 

2.  Observations and suggestions ............................................................................. 15 
2.1.  Observations related to the Entity Level Operations: ............................................ 15 
2.2.  Observations/Feedback related to the Housing Microfinance Program Design: ............. 18 
3.  Underwriting Framework .................................................................................... 20 
4.  Monitoring & Risk Management ........................................................................... 20
Study of Savings Pattern and Credit Behaviour of Informal Segment Households and Understand 
the Potential of Housing Micro Finance 

1  Review of Literature ......................................................................................... 23 

1.1  Market potential ....................................................................................... 23 
1.1.1  Rural Housing ...................................................................................... 23 
1.1.2  Urban housing ...................................................................................... 23 
1.1.3  Housing among vulnerable groups .............................................................. 23 
1.2  Savings and credit behaviour of low income households ....................................... 24 
1.2.1  Household Income ................................................................................. 24 
1.2.2  Household saving .................................................................................. 24 
1.2.3  Household credit ................................................................................... 24 
1.3  Housing Finance product ............................................................................ 24 
2  KGFS customer database review ......................................................................... 25 
2.1.1  Annual household income of KGFS customers ................................................ 25 
2.1.2  Annual surplus income of KGFS customer’s households .................................... 25 
2.1.3  Source of Income .................................................................................. 26 

5
 2.1.4  Asset Ownership ................................................................................... 26 
2.1.5  Utilization of loan for housing ..................................................................... 27 
3  NABARD SHG Bank Linkage Program ................................................................... 28 
3.1.1  Savings .............................................................................................. 28 
3.1.2  Credit................................................................................................. 28 
3.1.3  Credit behaviour .................................................................................... 29 
4  Individual Survey............................................................................................. 30 
4.1  Individual Survey Results ............................................................................ 31 
4.1.1  State-wise Insights ................................................................................. 31 
4.1.2  House Ownership .................................................................................. 32 
4.1.3  Monthly Income..................................................................................... 32 
4.1.4  Household income pattern ........................................................................ 32 
4.1.5  Dependence on Secondary Income ............................................................. 33 
4.1.6  Household monthly Expenditure ................................................................. 33 
4.1.7  Household expenditure pattern .................................................................. 33 
4.1.8  Household saving .................................................................................. 34 
4.1.9  Household saving pattern ......................................................................... 34 
4.1.10  Consumptions Shocks .......................................................................... 34 
4.1.11  Capacity to save ................................................................................. 35 
4.1.12  Household credit ................................................................................ 36 
4.1.13  Loan providers ................................................................................... 37 
4.1.14  History of expense on housing ................................................................ 37 
5  Market potential for housing finance ...................................................................... 38 
5.1  Household capacity to avail credit .................................................................. 38 
5.2  Market Demand ....................................................................................... 39 
5.3  Required loan size .................................................................................... 40 
5.4  Affordable EMI ......................................................................................... 41 
5.5  Scope for formal lending institutions................................................................ 41 
6  Conclusion .................................................................................................... 42
Proposed Model for scale up of housing microfinance 

1.  Background of the Bank-SHG Linkage ................................................................... 44 

2.  Structure of the Proposed Program ....................................................................... 44 
3.  Role of Stakeholders in Detail ............................................................................. 45 
3.1.  Role of MFI ............................................................................................. 45 
3.2.  Role of IFMR Capital ................................................................................. 46 
3.3.  Role of Bank ........................................................................................... 46 
3.4.  Role of the NHB ....................................................................................... 46 
4.  Revenue structure ........................................................................................... 46
Summary of the Workshop on "Scaling up of Housing Microfinance" 

References: ........................................................................................................ 49 

Websites, articles ................................................................................................. 50 

6
7
 1. Introduction
 

Housing is one of the basic needs of every individual.Besides providing shelter and security, it also
enables easy access to the credit market by working as collateral comfort / security. With time, there
has been expansion and improvement in the housing finance market in India by way of various
financial reforms; however the housing loans as a %age of GDP have remained at around 7 %,
significantly lower than the levels achieved in most of the developed countries. This indicates the
extent of opportunity for deeper penetration in such markets. Housing shortage has always been a
major problem over the years. The total housing shortage in rural areas is 43.67 million units and
18.78 million units in urban areas. The situation is appalling with 95% of the housing shortage
pertaining to the Economically Weaker Section (EWS) and Low Income Group (LIG) categories.
However, low income segment housing sector across in the country is constrained by several factors
that arise from issues relating to land, access to housing finance, fund mobilization, stringent
regulatory framework etc. Considering the huge need for housing among the low income households
and the lagging of business initiatives of the housing sector indicates the extent of opportunity for
deeper penetration of this market.

The absence of documented evidence of income among the segment of low income and informal
households makes it very difficult to estimate their repaying capacity, which is especially important for
providing long term debt products for housing and allied needs of such households. In this scenario, a
study was taken up by IFMR Capital with the support of IFMR Research to look at the saving pattern
and credit behaviour of low income and informal segment households, so as to explore new market
potential. To achieve this, the research was carried out in two parts

- by conducting the database review of an existing retail financial institution called IFMR Rural
Channels & Services Pvt. Ltd. (“IRCS”), which provides various financial services to remote
rural households under the brand Kshetriya Gramin Financial Services (“KGFS”)
- by conducting an in-depth individual survey in eight selective states of India among the
sampled low income households.

The lessons learnt and insights gained from the study reveals that about 30 % of low income
households have regular income stream that can pay off a monthly amortising housing loan. It is also
seen that the requirement of home improvement loan would be more than that of the home loan
requirement. The required loan size for low income households would be in the range of INR 50,000
to INR 200,000 with an affordable EMI of around INR 1,000. There scope for formal credit institution
to double its existing market shareowing to the current low coverage in financing low income housing.

8
 2. Background

Housing indirectly contributes to the social, physical and psychological wellbeing of the communities.
Besides providing shelter and security, it also enables easy access to the credit by working as
collateral comfort / security. Overall, good quality housing has a long term impact on the productivity
of individuals and hence growth of the economy.

In addition, the housing sector has strong linkages with other ancillary industries which include
construction workers, builders, developers, suppliers, civil engineers, property consultants, furnishers,
interior decorators etc. Housing sector ranks fourth in terms of the multiplier effect on the economy
and third amongst 14 major industries in terms of total linkage effect. After agriculture, the housing
and real estate industry is the second largest employment generator in India. The sector is labour
intensive and, including indirect jobs, provides employment to around 33 million people.

Surveys on low-income households conducted in developing countries indicate that priority for
housing is higher than education and health (Ferguson, Bruce and Haider, Elinor 2000). However,
housing for lower income segments in developing countries is undeveloped and constrained by
several factors that arise from issues relating to land, access to housing finance, fund mobilization,
stringent regulatory framework etc.

As per the latest Government estimates, the housing shortage in the urban areas of India is 18.78
million units. As per the Working Group on Rural Housing for the 12th Five Year Plan, the total
housing shortage in rural areas is estimated at 43.67 million units. On the other hand, housing loans
as a %age of GDP have remained at around 7 %, significantly lower than the levels achieved in most
of the developed countries.

It is observed that the housing shortage is typically in the lower income and informal sector
households. Most of this segment consists of salaried employees within the informal sector (e.g.
drivers, domestic help, casual labourers, employees in the micro-enterprise sector), or self-employed
micro entrepreneurs running their own businesses (e.g. vegetable vendors, restaurant owners, small
fabrication unit owners). In the rural space, the income is mostly dependent on agriculture and highly
seasonal. One of the key constraints in tapping this market is the lack of conventional documented
income proof. Mainstream housing finance is dependent entirely on the availability of formal
documented income proof. Owing to the lack of documented proof of income, the informal sector,
which also constitutes most of the low income households, remains largely under-served by
mainstream housing finance companies.

Urban Housing Shortage:

As per the Census 2011, only about 31 % of the country’s population live in urban areas. It is
noteworthy that this is a smaller proportion compared to other developing countries.

China 45%
Indonesia 54%
Mexico 78%
Brazil 87%

However, projections are that by 2031, about 600 million Indians will reside in urban areas, an
increase of over 200 million in just 20 years. While the Technical Group on the Estimation of Housing
Shortage projects the total shortage of dwelling units in urban areas in 2012 to be 18.78 million units,
the projected slum population in India is 94.98 million in 2012. Further, the Group has also estimated

9
that 73 % of the shortage in self-occupied housing is in bottom 40 % of the urban households in terms
of income strata.

It was further estimated that the most of this shortage pertains to Economically Weaker Sections
(EWS) and Lower Income Group (LIG)i segmented on the basis of monthly per capital expenditure.

Rural Housing Shortage:

One of the major reasons for continued lack of proper housing in rural India is lack of access to
finance. According to the NSSO, about 66 % of the financing of new construction in rural areas in
2010–11 was done by rural families with their own resources. It has also been found out that about 27
% construction had some amount financed from non-institutional agencies such as moneylenders,
family and friends. Only 9 % of the housing construction was financed by a formal financial institution.

A Committee constituted by the Ministry of Rural Development for formulation of Concrete Bankable
Schemes for Rural Housing (2011) found that although overall credit flow to the housing sector
witnessed a growth of about 30 % over a period of five years preceding 2010, lending to rural areas
grew only about 10 %.

Housing for urban residents:

Developing housing for the lower income segment in Indian cities faces a wide array of challenges
due to economic and regulatory issues. Lack of availability of cheap urban land, rising costs of
construction, high cost finance, regulatory issues coupled with expected low margin possibilities
keeps private builders out of the low income housing segment leading to supply-side constraints. On
the other hand, lack of access to home finance is a serious demand-side constraint, which impacts
the ability of low-income groups and the informal sector customer to buy housing in the organised
sector. While it is assuring to know that some of these are gradually being mitigated with concerted
efforts from both from Government and private institutions to facilitate development of this sector, a lot
is still left to be done.

In India, private developers target luxury and upper-mid housing segment, since it fetches a premium
over low income housing. This leads to a situation where there is sustained supply for the high end
segment. On the other hand, the housing for the poor and EWS is primarily seen as prerogativeof the
government for welfare purposes. Thus, it is the housing requirements of the lower and middle
income groups that are grossly neglected, and there exists a huge gap in the supply of affordable
houses primarily demanded by this segment of households in India.

It is very necessary to attract market based solution providers to come into this segment to ensure
that the critical problem of access to housing is addressed at scale. We believe that a tremendous
opportunity is thus available for private project developers with a focus on the lower income housing
segment to come up with effective solutions backed by appropriate strategy and technological know-
how that can ensure good quality housing at costs that are affordable for the lower income segment.

As per the Monitor Group study, the potential size of the urban mortgage market for low-income
housing segment (Monthly Housing Income of INR 5,000 – 20,000) has been pegged at INR 880,000
Crores.

Housing for Rural residents:

While estimates on mortgage market in India in the rural areas are not available, the market is huge
as indicated by the findings of several agencies. However, primarily due to the lack of reach and
uncertainty over titles of properties, the mortgage market remains highly under-penetrated in India. In
fact, very few of the new age housing finance companies have ventured into the rural housing finance
space. It is estimated that while the housing needs of the rural population may be considerably

10
different with home improvements, incremental constructions or construction of toilets being the key
purpose. The 65th Round of NSSO study revealed that only 55 % of the rural households lived in
pucca houses. Moreover, sanitation facility was not available for nearly 65 % of rural households.In
fact only 18 % of rural households had all three facilities (drinking water within premises, latrine and
electricity). This indicates the potential for use of financing for provision of amenities in the household.
It is also observed that the ownership of houses is more than 95 % in rural areas. This reduces the
need for construction of entirely new houses as required in urban centres where the ownership is as
low as 62 %.

Favourable Developments:

Having identified this gap in the low income housing sector, a number of affordable housing finance
companies (AHFC) and low income housing projects have started operations over the last few years
targeting the low income informal/semi-formal segment customer.

We believe that tremendous opportunity is available to new and existing HFCs who can innovate in
the low income/informal sector housing finance by leveraging their expertise of lending in the informal
markets. Also, the role of the affordable housing finance companies catering to this segment is key in
bridging the gap of availability of finance to such potential home owners who are not financed by the
mainstream financial sector. Given the huge gap between the supply and demand in the affordable
housing finance market, there is opportunity for newer HFCs to enter the market while the existing
HFCs continue to grow. It is crucial that the access to capital is ensured for these HFCs in India.

While the affordable housing finance sector has seen a number of players enter the segment in the
last few years, affordable housing construction companies have been few. In most cases, there have
been some established builders who cater to the luxury/high-end segment that also launched
affordable housing as a business line.

We understand that a long term solution to the problem of lack of quality housing for the lower income
households can be achieved only if there is focussed and scalable market based intervention on both
the demand and supply sides. It is necessary to harness the enthusiasm, identify and promote
scalable models to address the housing shortage problem.

3. Introduction to the Project

Keeping with the spirit of developing scalable solutions mentioned above, a study was taken up by
IFMR Capital with the support of IFMR Research to study on the savings pattern of low income and
informal segment households so as to explore new market potential by understanding the possibilities
of developing long term debt product for housing.  

The National Housing Bank (“NHB”) has recognized the fact that Micro Finance Institutions have been
able to penetrate into remote locations and they can serve as delivery channels for housing finance to
the underserved sections of society. Based on this understanding, the NHB, in its endeavour to
provide housing to the under-served segments of the society pioneered a Housing Microfinance
Program(the “HMFProgram”).

As per the NHB’s records, the HMFProgram of the Bank is spread across 11 states which include
Andhra Pradesh, Karnataka, Tamil Nadu, Maharashtra, Odisha, Gujarat, Kerala, Assam, Uttar
Pradesh, West Bengal and Madhya Pradesh. The beneficiaries include farmers, housemaids, petty
traders, artisans, dairy workers and other low income segments. More than 90 % of the beneficiaries
are women. The approximate income levels of the beneficiaries range between INR 5,000-7,000 per
month. Besides, the NHB has also opened a specialized window for Water and Sanitation programs
being taken up by microfinance institutionsfor their members of Self Help Groups (“SHGs”). These
programs form an integral part of the HMF Programof the NHB.

11
A study on housing microfinance was commissioned by the NHB and DFID with the following
objectives

1. To evaluate the performance of the HMFProgram initiated by the NHB

2. To conduct a representative study across rural and urban poor and ascertain credit and
savings patterns and other relevant information for product design

3. To prepare recommendations on scaling up the HMF Programfor lower income and informal
sector households, product design and an underwriting guidelines framework for housing
microfinance

The NHB and DFID selected IFMR Capital Finance Private Limited (“IFMR Capital”) to conduct the
study. IFMR Capital, together with other sister institutions within the IFMR group, has developed
significant understanding of institutional and operational models across microfinance and affordable
housing finance, for providing financial products to informal segment households. Based on this
experience and expertise,IFMR Capital partnered with the NHB and DFID with the overarching goal of
enabling efficient and reliable access to finance to help meet the housing, sanitation and allied needs
of informal segment households in India.

While the three components of the study is covered in detail in the later part of this report under
respective sections, a brief description of each study is given below.

Evaluation of the NHB’s Housing Microfinance Program

The NHB has supportednon-profit microfinance institutions(“NGO-MFIs”) and other institutions with
financial and technical assistance for providing loans to their clients/beneficiaries to help them
improve their housing conditions and enable them to own a home of their own. The NHB has around
22 partner NGO-MFIs that have been supported under the housing microfinance program. IFMR
Capital evaluatedthe NHB’s housing microfinance program with the objectives of:

1. Documenting the strengths, weaknesses and best practices of the implementation of the
housing microfinance program by the NHB’s partner institutions, based on a sample study

2. Suggesting the opportunity and gaps that need to be addressed, to scale up the housing
microfinance program

3. Provide technical assistance to the NHB on developing a due diligence and evaluation
framework for MFIs, to be potentially enrolled as partners under the housing microfinance
program

Study of Savings Pattern and Credit Behaviour of Informal Segment

Households and Understand the Potential of Housing Micro Finance
In the absence of documented evidence of income, it is difficult to estimate the repayment capacity of
customers from informal segment households, which is especially important for providing long-term
debt products for housing, sanitation and allied needs of such households. However, information on
the savings pattern of such households can be a proxy for estimating the household level disposable
income. Informal sector households may not have access to banks for savings, but typically save
with other institutions/instruments such as post office savings schemes, chit funds, self-help groups
(SHGs), NGO-MFIs etc. IFMR Capital partnered with IFMR Research to conduct field research on the
credit behaviour and savings pattern of informal segment households, to assess the possibility of
offering products to such households.

12
The specific objectives of the study are to:

1. Identify, enumerate and compare the different means of savings, credit availed and
investment utilised by informal segment households

2. Document the pattern of savings across periodic savings and occasional savings made
by the households and the credit profile of the households.

ii
3. Assess the possible outreach and the potential financial impact of housing finance
through SHG-Bank Linkage Model through a desktop review of the data collected in the
survey, as well as data available through public sources (including RBI/NABARD data) on
the SHG-Bank Linkage program across various parts of the country

Model for scaling up access to housing finance for lower income and
informal sector households
Based on the study conducted, propose an appropriate model for scale up of the housing
microfinance program and enable access to housing finance for the informal sector households.

1. Assess the potential market for informal housing finance in rural/urban areas (including
defining criteria for eligible beneficiaries)

2. Specifically, designing a Self Help Group - Bank (“SHG-Bank”) or Self HelpGroup -

Housing Finance Company (“SHG-HFC”) linkage product, where the NHB can play the
refinancing / credit guaranteeing role

3. Document the risks, design mechanisms of risk sharing and risk mitigation in housing
finance under a SHG-Bank/SHG-HFC linkage product

13
Evaluation of Housing
Microfinance Program

14
 1. Introduction
The NHB has supported NGO-MFIs and other institutions with financial and technical assistance for
providing loans to their clients/beneficiaries to help them improve their housing conditions and enable
them to own a home of their own. The NHB has around 22 partner NGO-MFIs that have been
supported under the housing microfinance program. IFMR Capital proposes to evaluate the NHB’s
HMFProgram with the objectives of:

1. Documenting the strengths, weaknesses and best practices of the implementation of the
housing microfinance program by the NHB’s partner institutions, based on a sample study

2. Provide technical assistance to the NHB on developing a due diligence and evaluation
framework for NGO-MFIs, to be potentially enrolled as partners under the HMF Program

3. Suggesting the opportunity and gaps that need to be addressed, to scale up the HMF
Program

In order to understand the current strengths and weaknesses of the HMF Program and suggest
measures of improvement, an initiative was taken by IFMR Capital to conduct due-diligence of a
sample of the NHB’s partner institutions. The geographical scope of the proposed project was
decided such that NHB’s partner NGO-MFIs situated across different parts of the country are covered.
A list of NGO-MFI partners doing housing finance was agreed upon and due diligence of the NGO-
MFIs were conducted based on a due diligence and underwriting framework prepared by IFMR
Capital. The next section outlines the observations made by IFMR Capital during the due diligence
process.

2. Observations and suggestions

The NHB has put in a tremendous amount of effort to promote housing microfinance in the country by
getting into active partnerships with several NGO MFIs. However, the scale up of the program is
affected by practical challenges. Given that the NHB has run this program for some time now, it was
an opportunity to learn from the brilliant work done already, assess the situation and bring about
modifications in the approach towards housing microfinance to ensure a more sustainable scale up.

2.1. Observations related to the Entity Level Operations:

Positives

Observation Impact/Possible Impact

Synergy with existing  Easy to replicate and provide huge opportunity for scaling up.
microfinance program,  Separate infrastructure cost and efforts are reduced.
where matured SHGs Advantage of having credit and repayment history.
are provided with
housing loans.

Group guarantee Based on existing social collateral system helps taking responsibility
established of each other in stress period.

Loans only to 3-4 cycle  Better selection of client as credit and repayment track record has
customers been already established.
Client awareness regarding the organization and its processes are
very high.

Potential Areas of Improvement

Observation Impact/Possible Impact Suggestions

15
Origination  Less rigour in credit
&credit evaluation evaluation process
is conducted by
the same team
Credit Bureau is  Client screening is not
not in use. fool proof. Use of a
credit bureau would be
an additional source of
useful information in
credit evaluation.
Clients were  It may be beyond their
given concurrent capacity of customers
loans to pay the debt of 2-3
loans and in stress
situation loan might
lead to default.
Detailed cash  The loan appraisal is
flow analysis is very much the same for
missing microfinance where
social collateral is focus
for lending
consideration.
 However, housing
microfinance loans are
slightly bigger and
longer tenorthan
normal microfinance
loans, a detailed cash
flow analysis of the
household is necessary
to verify its loan
repayment capability.
End use  Clients might use the
verification is not money for other
ensured purposes than originally
communicated.
Current audit  Credit and
doesn’t capture documentation risk.
the housing  The lending process for
microfinance housing microfinance is
program not in the scope of the
regular internal audit
process may result into
various process related
 The housing microfinance loans should be
made based on a more rigorous credit
appraisal involving separate credit and
business verticals.
 This is a significant departure from the
conventional microfinance procedures.
 Highmark or Equifax should be used for better
client screening process and build in healthier
data base for others as well.
 It also creates a track record of customers in
the credit bureau enabling good customers to
have an established credit record improving
the possibility of enabling access to credit from
traditional financial institutions in future.
 Fear of a default history can induce good
repayment behavior – already witnessed in
conventional microfinance.
 Could be avoided as a policy; or fix a
maximum limit of loan outstanding with similar
kind of profiles.
 Develop a de-dupe process within internal
systems to remove risk of multiple loans to the
same person.
 Develop a system of collecting informal
income proof – this is a practice followed by
many of our partners to cross check against
verbal answers. Our partners check such
informal proof for over 3-6 months
 Photographs of business and also of the
property to be constructed could be taken
 Verify the above assumptions / client’s
business on at least an annual basis, as
customer’s business could change significantly
 Commence work on templates, which can be
used for training staff & recording credit
decisions.
 Should start using loan utilisation checks on
each and every loan to verify end use and
check diversion of loan obtained.
 Inclusion the same within the in-house internal
audit scope will strengthen the credit process
and will ensure that checks and balances are
in place.
16
 gaps.
Variation in  In most of the cases,  To explore strengthening of security creation
security creation the loans are effectively where possible – this could significantly
collateral-free strengthen the originators’ balance sheets as
well as open up a huge market for housing
loans.

Need for  Family of customer in a  Should be made compulsory

Insurance cover stress in case of death
of the customer
Customer  May lead to issues  Strengthening customer protection measures,
protection related to inappropriate like grievance cell, suggestion box at branch
measures are not practices being place etc.
implemented fully adopted on the field  To include this in internal audit scope.
and hence leading to
customers having to
deal with wrong
products or
inappropriate behavior
from staff.Reputation
risk for the NGO-MFI.
Staff  Staff will not able to  Focus on staff training. the NHB should take
understanding on appreciate the different up active role in training of staff within the
Housing process and carefully chosen NGO-MFIs
Microfinanceless. underwriting of housing  This could especially focus on templates,
microfinance and will understanding businesses, measurement of
lead to process gaps in cash flows, triangulating business & household
the system and information
understanding gap
among customers.
In general, the  The organisation may  Active engagement and handholding carefully
board of the NGO lose focus on housing identified NGO-MFIs by the NHB.
is active but microfinance, resulting
clarity of vision in inadequate
with regards to investment in critical
Housing Finance areas like training,
was missing. internal audit and other
Lack of future functions.
direction.

Inadequate  Loan officers are not  Designing appropriate incentive structures to

incentives for incentivised for new encourage housing finance.
housing loans business development
business. and will focus into
business which give
them incentive.
Mostly  No system knowledge  Should explore better featured MIS and start
computerized but being built. This can using the existing report for management
MIS provides result in significant decisions.
basic level deviations as  Training of senior management in using the
information. operations scale up. MIS for their strategic and management
decision.

Compliance are  Credit and  Inclusion the same at house internal audit

17
not recorded, no documentation risk. scope will strengthen the credit process and
penalty for not will out checks and balances in place.
meeting the
compliance.

2.2. Observations/Feedback related to the Housing Microfinance Program

Design:
Observation/Feedback Impact/Possible Impact Suggestion
Received

The NHB had started the  Lack of stickiness amongst the  Need to focus on a smaller
Housing Microfinance NGO-MFIs. The NGO-MFIs does number of high quality
Program with a large not allocate adequate resources institutions and initiate a
number of small required to carry out serious dependable funding
originators with small housing finance business. channel tied to covenants
amount of exposure in which push the entities to
each. improve upon the existing
weaknesses.
 Larger amount of funding
will contribute significant
revenues to the NGO-MFI
and this will encourage
them to take up the
housing microfinance
program seriously.
 NHB should alternately
identify other specialised
players to play the role of
identifying and partnering
with the NGO-MFIs to do
Housing Microfinance. The
NHB should limit itself to a
capacity building and
facilitation role.

The NHB proposed a  Inability of NGO-MFIs to manage  The NHB should begin with
margin cap of 5% costs within the margin specified. at least the RBI
benchmarkand look at a
portfolio size linked step
down in margins.

The loan approval from  Clients and NGO-MFIs may lose  Focus on a smaller number
NHB is long drawn interest in the program. of entities with stringent
process - typically more  Housing Finance may beviewed as processes will make the
than 6 months a one-off project by the NGO-MFI. NGO-MFIs strive to
improve their processes
and make it easier for the
NHB to expand the housing
microfinance program.
 Clear communication and
feedback on the areas of
improvement to be tracked

18

While the NHB allows
loan sizes of more than
INR 50,000 for housing
microfinance, the NGO-
MFIs generally consider
INR 50,000 as the upper
limit given that mortgage
security is required
beyond that. The upper
limit of INR 50,000 is
viewed by the clients as
very low amount, even
for renovation and
repairs, owing to rising
cost of construction
materials and the clients
end up borrowing from
other costly sources for
balance amount.
NGO-MFIs are required
to lend either for housing
or sanitation depending
upon the sanction but
not both.
 Clients may not be interested in a
smaller ticket size loan.
 Encouragement to informal lenders
to meet further requirement.
 NGO-MFIs are unable to tap the
potential client segment.
over time.
 The NGO-MFI staff should
be trained appropriately
regarding the process of
formalising titles.
 Product structures with
paralegal documentation or
alternate collateral.
 In order to facilitate active
interest and commitment
from the NGO-MFIs, a
continuous stream of
funding is to be enabled
with adequate hand-
holding support.
 The funding to the NGO-
MFI may be given to assist
both housing and sanitation
without limiting the purpose
to one of them.
 In general, limiting purpose
of loan without the ability to
track ground operations will
result in misuse/ fraud
19
 3. Underwriting Framework
IFMR Capital understands that evaluation of financial performance is a lag indicator of performance of
an organisation. Even in cases where the current financials are good, the future performance of the
company is dependent on key operational and structural aspects of the organisation. The NHB should
consider focussing on these key structural and operational parametersin addition to the financial
performance to evaluate the suitability of an organisation to partner with the NHB. The central
parameters to be evaluated as a part of the NGO-MFI evaluation are given below.

Board and Management

Governance, Management, Organisation Relationship and Credentials

Location and Organisation specific factors

Human Resources

Origination

Systems, Processes & Technology Collection & Cash Management

MIS & Technology

Risk Management & Control Systems

Profitability Ratios

Financial Evaluation and Portfolio Quality Portfolio Quality

Liquidity and ALM

Detailed underwriting guidelines are provided in a separate spread sheet along with this
package.

4. Monitoring & Risk Management

Once on-boarded, each partner NGO-MFI needs to be kept under strict monitoring. An
appropriate monitoring and risk management framework needs to be built to ensure that the
MFI continues to originate high quality portfolio. The risk framework should consists of risk
monitoring, portfolio- level risk reporting and analytics and risk modelling across the portfolio.
Continuous due diligence must be conducted on every partner MFI at least three to four times
a year. In the follow up monitoring, emphasis should be on checking the operations in the
field and the quality of systems vis-à-vis the growth of the NGO-MFI. The monitoring visit
must cover process adherence and adherence to their internal guidelines as well as status of
being tuned to any political or other external risk. In addition, adherence to Customer
Protection and Fair Practice Code has to be established.A detailed indicative list of
questions is attached with this package that can be used take updates on various
aspects of the operations during the monitoring visit.

In addition to this, off-site monitoring is conducted on a quarterly basis, based on specific

operational and financial reports that the NGO-MFI is required to send. The format in which
information is sought is also provided along with this package. The quarterly financial

20
and operational information is analysed, and any patterns or observation of concern are
investigated and followed up with.

Using all the aforementioned strategies, the risk monitoring function is responsible of
detecting early warning signals and geographic stress signals that may have the potential to
adversely affect the partners' serviceability of the portfolio.

IFMR Capital has a strong risk and monitoring team. IFMR Capital can play an active role in
monitoring the operations of the program and also providing a risk analytics support to banks
and other investors.

21
Study of Savings Pattern and
Credit Behaviour of Informal
Segment Households and the
Potential of Housing Micro
Finance

22
1 Review of Literature
This section presents the empirical literature dealing with past studies on low income households in
India with reference to their income, saving and credit behaviours.

1.1 Market potential

1.1.1 Rural Housing
The Working Group on Rural Housing for the Twelfth Five Year Plan (2012-17), has estimated the
total housing shortage in rural areas at 43.67 million units. It is a major concern that 90 % of the rural
housing shortage (approximately, 39.30 million units) are in respect of Below the Poverty Line (BPL)
categories.

The vulnerabilities to the rural housing sector are often thought to be limited to the delivery system for
housing materials, services and finance. Formal housing finance in rural areas is rather
inconspicuous. The lack of vibrancy in the market for village properties and the marked volatility in
agricultural incomes combine to dampen the prospects of this sector.

There are two ways in which the total potential size of the affordable rural housing finance market can
be estimated, one is on the basis of the condition of the structure and the other by type of the
structure. According to the 65th round of National Sample Survey conducted only 31 % of rural
households are good in condition whereas 51 % are satisfactory and 18 % are bad in conditioniii.
Taking a very conservative estimate with this fact, even if one considers that all the households who
are living in bad condition houses will require finance for major repairs/construction, the total number
of home loans needed in rural area will be to a tune of 3.13 crore.

1.1.2 Urban housing

As per the latest Government estimates, the housing shortage in the urban areas is 18.78 million
units. The situation is appalling with 95% of the housing shortage pertaining to the Economically
Weaker Section (EWS)ivand Low Income Group (LIG)vcategories which does not translate into
economic demand due to lower affordability by the poor.

For the first time since Independence, the absolute increase in population is more in the urban areas.
The level of urbanization increased from 27.81 % in 2001 Census to 31.16 % in 2011 Census. This
spurt growth of population in urban areas of India has increased the number of homeless people,
slums and squatters which has resulted the concept of low income/affordable housing for such
segments to gain importance.

1.1.3 Housing among vulnerable groups

1.1.3.1 Housing situation in female headed households

The total number of female headed households in the country is 2.69 crore, out of which 1.75 crore
are in the rural areas and 0.94 crore are in the urban areas (Census 2011).

The census reveals that the female headed households living in urban areas is considerably better
compared to the rural female headed households. As against 21.1% in case of rural areas, the
proportion of female headed households living in the houses with roof made either from
grass/thatch/wood/mud or plastic/polythene is only 6.5% in urban areas. Similarly, the proportion of
female headed households living in houses with walls made from grass/thatch/bamboo etc. or
plastic/polythene or mud/un-burnt brick is 16.3% in urban areas compared to 44.1% in case of rural
areas.

1.1.3.2 Housing situation in SC & ST households

The total number of SC households in the country is 4.42 crore, out of which, 3.29 crore are in rural
areas and 1.13 crore are in urban areas (Census 2011). The census data reveals that the condition of
houses is relatively poor in the case of ST households than SC households. Around 42% of the SC
rural households are living in houses where the roof is either of Grass/thatch/ bamboo/ wood/mud etc.
or Plastic/ Polythene or Hand-made tiles, as against 57% of the rural ST households. Considering the

23
material used to construct walls, 45% rural SC household live in houses with walls made from
Grass/thatch/bamboo etc. or Plastic/ Polythene or Mud/un-burnt brick, while a significantly higher 68%
of ST households are living in houses with walls made from similar materials.

1.2 Savings and credit behaviour of low income households

1.2.1 Household Income
According to NCAER report authored by Raj Shukla, (2007), the average household surplus income
per annum, i.e. the difference between the income and expenditure, was INR11,613 for rural
household and INR 26,762 for urban household. Raj Shukla (2007) also reported that 41 %
households in rural area depend upon agriculture as the source for income compared to 3 % in urban
areas of India. On the other hand the regular salaried households in the rural and urban areas of India
were 10.6% and 36.9% respectively.

1.2.2 Household saving

Mukesh et al (2011) reported that 73 % of households in rural areas and 84 % of households urban
areas save through fixed deposit. In addition to this, instruments like UTI Scheme, LIC, RDs in Post
Offices are equally popular in rural areas, while instruments such as bonds, preference shares,
EPF/PPF etc. were mainly restricted to urban areas. Similar findings were also reported by several
research works like NCAER, (2011) and Akhand et al (2011).

As per the Microsave study reported by Akhand et al 2011, volatile cash flows, unanticipated events
and unplanned expenditures are the major factors inhibiting the mobilization of savings among the
EWS and LIG households. The report by NCAER (2011) sates that the EWS and LIG households are
able to save even after meeting the daily food expenses and setting aside money for health
emergencies, education of children etc.

1.2.3 Household credit

Abhijit et al (2013), from his research which involved a random experiment to understand the impact
of the micro-finance reported that when microcredit becomes available, the households tend to
sacrifice short or even medium-term consumption in order to get some durable goods or to invest in a
business.

Anirban et al (2012), conducted a qualitative study among the beneficiaries of MFI and found that
Informal source of credit is still prevalent among low income households. The report also states that
clients of MFI find the MFI loans very convenient as they can be easily repaid in fixed weekly
instalments over time. SHG loans are liked because of low interest rates charged and the flexibility of
the loan tenure. However, inadequate loan size is a major drawback of the SHG loans. Informal
sources are preferred when the households require quick loans.

1.3 Housing Finance product

The housing market in India is influenced by both demand and supply side constraints. The major
supply side constraints include the lack of availability of land, finance at reasonable rate,
infrastructure, legal and regulatory framework and the limitations of the private and other stakeholders
to provide low income housing. The current financing mechanism prevalent in the country mostly
targets middle and high income sections of the society while the households falling under low income
and economically weaker sections category especially from the unorganized work force have no or
limited access to housing finance. This can be attributed to the reluctance of the formal housing
finance providers to cater to these segments due to seasonal incomes, lack of collateral, lack of title
deeds, no regular payments and high transaction costs.

MHUPA, 2011 in its guidelines for Housing has defined that the minimum size of built up area for
EWS and LIG households as 300 and 500 Sq. Ft respectively, with EMI not exceeding 30 to 40 % of
the monthly income of buyer.

Minakshi and Stuti (2010) in theirstudy explored how best to design and provide a housing micro-
finance (HMF) product through an MFI which is specifically targeted to new home construction by low-

24
income communities s in rural are eas. They reeported that the cost of constructing g a pucca structured
house iss estimated to t be around d INR300 pe er square fee ng the fact that most households
et. Considerin
wanted a house off area in the e range of 300 to 400 0 square fee et, the consstruction cos st will be
INR90,0 000 to 120,0 000. The report reveals that the willingness to pay monthlyy instalments for the
loans raanges from INR700
I to 3,000
3 amongg the low inccome house eholds. Past experience with the
client an
nd land title were two im mportant crite
eria used by the MFIs for providing housing
h micrrofinance
loans. Itt was found though, MFIs retain clie ent land titless, and they only act as a psycholog gical curb
against default. Fore eclosure will be very time e consuming and burdensome for MF FIs providing
g housing
finance. It will be diffficult for an MFI
M to justifyy evicting a loow-income household
h fro
om their houuse in the
event off default.

2 KG
GFS custom
mer database review
Kshetriyya Gramin Fiinancial Serv vices (literallly mean Reg gional Rural Financial Se ervices), abb
breviated
as KGFS S, is a rural financial
f serv
vices delivery y model desiigned and ow wned by IFM MR Rural Fina ance and
promote ed by IFMR Trust as part of its miss sion “to ensure that eve ery individua
al and enterp prise has
complete e access to o financial services”
s KG
GFS spreadss its wings beyond the e parameterrs of the
traditional banking system
s or microfinance in nstitutions byy building tru
ust and relatiionship with the local
househo olds.

The data from the MIS

M of KGF FS was colle ected with reeference to its customerrs livelihood, income,
saving and
a credit prractices fromm all the three
e states of K
KGFS operattion viz. Tam
mil Nadu, Od disha and
Uttarakh
hand. The results of the data
d collected
d from the KGFS
K are pre
esented undeer this section.

2.1.1 Annual hou usehold incoome of KGFS customerrs

Figure 1 presents th
he data of an
nnual househ e KGFS operration states of Tamil
hold’s income across the
Nadu, Odisha
O and Uttarkhand.
U

More tha
an 45 % of households
h n Tamil Nadu and Odisha had an annual househ
in hold Income less
l than
INR 1000,000. Uttarakhand had a slightly weaalthier popula
ation registering only 38%
% of households with
an annual income off less than IN
NR 100,000.
Fig
gure 1 Annua
al income of K
KGFS custome
ers

2.1.2 Annual surp

plus income
e of KGFS customer’s
c h
households

Surplus income is what

w the ho
ousehold is left
l with afte
er householdd and other expenses. Figure 2
presentss the data on
n annual surp
plus income of householdds across the
e states of KGFS operation.

25
An analyysis of the da
ata reveals that over 65 % of KGFS customers
c have an annuual surplus off more of
INR 50,000. The sttate of Uttarrakhand regiistered 18 % of househ holds with th
he annual su urplus of
greater than
t INR 200 0,000.

Figure 2 An
nnual surpluss income of KGFS
customerrs

2.1.3 Source of In ncome

It was fo
ound that moore than 50 % of the KG GFS custome ers depend upon
u daily wage
w as theirr primary
source of
o income. It is also obse
erved that 29 % of the below poverty line custome ers had agricculture as
their priimary sourcee of income e. Non-agric cultural sourrces of incoome support a larger proportion
househo olds from the
e above pove erty line housseholds com
mpared to the e below poveerty line custtomers. It
was obsserved that 18 % of the APL
A househo olds have sala aried income
e compared tot 5 % for BP PL.

Table 1 Overall source of in

ncome for the KG
GFS customers.

Overall Be
elow Pov
verty Abovve Poverty
Line (%) Line (%)

Business 5.60% 9.10%

%

Agriculture 29
9.00% 11.30
0%

Dairy 1.50% 0.90%

%

Labourer 56
6.40% 54.20
0%

Govt Emplo
oyee 1.40% 4.50%
%

Private Sec
ctor 3.10% 7.80%
%

Shop 2.50% 6.70%

%

Working Ab
broad 0.50% 5.60%
%

2.1.4 Asset Owne ership

Figure 3 presents th
he data of as
ssets owned by the housseholds acro S operation states of
oss the KGFS
Tamil Na
adu, Odisha and Uttarakhand

26
 Fiigure 3 Asset ownership of KGFS custom
mers

It was fo
ound that 88 to 98 % of KGFS house eholds own a house in a all the three districts.
d Sim
milarly, 65
to 95 % of KGFS customers
c ha
ave jewellery
y in all the th
hree states. 70 % of KG GFS custome ers in the
state off Uttarakhan nd have lan nds where asa Tamil Na adu and Od disha registtered 36 an nd 42 %
respectivvely in terms
s of land own
nership.

2.1.5 Utilization ofo loan for housing

h
Table 2 presents th he data on %age
% of KG
GFS custome
ers availing loan for hou
using purpos
se in the
states off Tamil Nadu
u, Odisha and Uttarakhan
nd.

Table 2 Utilization of loan fo

or housing by the KGFS custome
ers

State an
nd Loan Purrpose Jewel Loa an (Loan JLG Loan (Loan Salary Loan
n
amount IN NR 500 to amount INR oan amount
(Lo
INR 50,000) 15,000 to INR INR
R 5000 to o
25,000 INR
R 50000)
Odisha (Total) 6% 11% 22%
%
Refurbishme
ent and Repa
air 5% 10% 21%
%
New Constrruction and Purchase 1% 1% 1%
of homes
Tamil Nadu (Total) 4% 8% 10%
%
Refurbishme
ent and Repa
air 4% 7% 10%
%
New Constrruction and Purchase 0% 1% 0%
of homes
Uttarakh
hand (Total)) 16% 19% 47%
%
Refurbishme
ent and Repa
air 13% 18% 35%
%
New Constrruction and Purchase 3% 2% 12%
%
of homes

It is ob
bserved thatt Uttarakhan nd shows a high usag ge of creditt products forf home purchase/
p
improvement. From the data it ca an also be seen
s that pro
oportion of loans taken fo
or home imprrovement
from KGGFS is higherr than loans taken for pu
urchase. Thiss could also be due to the fact that lo
oan sizes
do not permit
p a full-ffledged home
e purchase. Moreover, it is also seen
n that the cusstomers takin
ng salary
loans ha
ave a higher propensity toowards takin
ng a home immprovement lloan.

27
3 NABARD SHG Bank Linkage Program
3.1.1 Savings
Under the NABARD SHG Bank Linkage Program, there are 79.6 Lakh Savings Linked SHGs (1.03
crore households) with a balance outstanding of INR 6551.41 crore as of March 2012. Interestingly,
internal lending constitutes about 70% of the savings accumulated. Only the surplus portion of
savings accumulated is maintained in bank accounts. The surplus average savings balance of the
SHGs is INR 8230. While there is a wide variation in the volume of savings in the bank accounts, we
observe that Karnataka has the highest average savings balance per SHG at INR 1.6 lakhs.

Region‐wise avearge savings  Agency‐wise spread of the savings 

balance of SHGs with banks (INR) linked SHGs
12000 10080
10000 7549 8210
8000 6175 5827
6000 4159 15%
4000
2000
0
27% 58%

Commercial banks Regional rural banks Cooperatives

3.1.2 Credit
Out of the total SHGs created under the program, only 50% of the SHGs avail of bank credit. As
mentioned in the earlier section, the credit needs of the members are met from the resources
accumulated within the group. The total outstanding amount of bank credit is at INR 36,340 Crores
and Average Loan Outstanding of INR 835,000 per group. It has been observed that while the volume
of lending increased at 14%, the number of SHGs financed has been declining over the past 3-4
years. The highest rate of decline in bank funding has been in the states of West Bengal, Odisha and
Kerala. It is also observed that 77% of the fresh lending has happened in the Southern States which
has historically been a stronghold of the SHG Bank Linkage Program. Interestingly, while the western
region has high savings balances (2nd in rank), in terms of loan outstanding, it is at the bottom of the
list.

Loan outstanding per credit linked  Agencywise spread of credit‐
SHG (INR) linked SHGs
10%
107,799 
120000
100000 78,884 
80000 55,568 62,307 46,987 
60000 47,113  30%
40000
20000
0

60%

Cooperative banks Commercial banks
Regional rural banks

In the case of loan outstanding as well, it is observed that the commercial banks account for the
largest share. This is similar to the experience in case of savings.

28
3.1.3 Credit behaviour
The SHG Bank linkage program has fared poorlyin terms of the portfolio performance. Statistics
reveal that the NPA levels at a national level are at 6.1% which is quite high. The delinquency levels
of the central region comprising of (MP, UP, UK, CH) has shown the highest levels of default with
NPA levels as high as 13%. At the state level, Meghalaya and Madhya Pradesh has shown the
highest levels of defaults with NPA as a %age of loan outstanding being 33% in Meghalaya and that
of MP being 22%.

Region‐wise Loan outstanding (INR lakhs)
3000000.00 15.00%
and NPA

2000000.00 10.00%

1000000.00 5.00%

0.00 0.00%
Northern North‐Eastern Eastern Central Western Southern
Loan O/s  Gross NPA Gross NPA%

29
4 Individual Survey
A three-phased survey in selected areas from eight states across India was conducted. These states
are: Tamil Nadu, Uttarakhand, Odisha, Madhya Pradesh, Bihar, Uttar Pradesh, Rajasthan and
Maharashtra. The entire sample comprises of 1,721 households across these states located in rural
and semi-urban areas. The data obtained from the sample aims to be reasonable representative of
the entire population with some significance level. The portfolio of the states were designed to include
more low income states in terms of per capita income and the population of these eight states cover
about 47% of the entire population of the country as per Census 2011. The various steps in data
collection are explained as follows:

Phase 1:Representative town and village (s) selection in each state. From the list of villages/district in
each state, we selected a district which has a close resemblance to state’s per capita income with
some confidence level. Among the selected districts, we selected town (s) / village (or village cluster)
in that particular district that would represent an average village in a given state when compared on
parameters such as population, literacy rate, income, and financial institutions, to ensure that the
village data has a reasonable level of external validity at the state level.

Phase 2: A census of households (HHs) in the selected area: Conducted to stratify the area in
different segments that are relevant to the strata population relevant to the study such as: income
level, agri/non-agri.A random selection of HHs was selected from the selected area/segments and
approximately 215 HH per state were interviewed.

Phase 3: In-depth interviews with HHs. A survey was conducted among the Head of the given HH.
The survey took approximately 30 minutes and was conducted in the local language by a trained
surveyor.

The details of the states and district chosen for the survey are listed below in Table 3

Table 3 Details of study sites and sample size chosen

State District Sample size State Level Per Capita

Income
Uttar Pradesh Barabanki 220 INR 1,365

Uttarakhand Nainital 214 INR 3,524

Madhya Pradesh Mandsaur 206 INR 1,758
Rajasthan Udaipur 219 INR 1,971
Tamil Nadu Thanjavur 214 INR 3,891
Bihar Muzzafarpur 209 INR 1,001
Odisha Koraput 220 INR 2,022
Maharashtra Kolhapur 219 INR 6,168
In addition to a state-wise analysis, we conducted an analysis based on income categories. The
sample was categorised into three groups as poor, marginal and mid-high income
householdsaccording to the income levels. This categorisation was done in relation to the poverty line
(PL).viTable 4 list the %age of household in the sample falling under each of this socio economic
category

Table 4 Proportion of households under the chosen socio economic categories

Income category / Socio Definition Households (%)

economic category
Poor < = PL 34
Marginal > PL but < = 2 times PL 47
Mid-high income > 2 times PL 19

The results of the data analysed from the individual surveys are presented under this section.

30
4.1 Individual Survey Results
4.1.1 State-wise Insights
The demographics of the surveyed households is as given below.

Table 5 State-wise insights of sampled households

Tamil Madhya Rajasth Uttarakhand Uttar Odisha Bihar Maharashtra

Nadu Pradesh an Pradesh
Sample 215 206 219 214 220 220 209 219
1
HH Size 4.35 3.95 5.04 5.99 4.35 3.98 5.45 4.42
Number of 1.7 2.1 2.9 1.9 1.6 1.7
Children (mean)
Parents live with 8.5 18.7 22.1 11.4 19.1 19.2
HH (%)
Monthly Income 7,385 7,475 7,245 7,994 4,815 2,855 6,569 4,728
(mean, INR.)
Poor(%) 29.4 22.1 5.0 15.5 30.5 92.7 35.3 42.5
Marginal Poor(%) 38.3 53.8 63.5 50.7 59.5 6.8 56.2 46.1
Mid-High 32.2 24.1 31.5 33.8 10.0 0.5 8.5 11.4
Income(%)
Monthly 5,993 3,954 6,927 7,229 4,104 1,906 5,038 3,970
Expenditure
(mean, INR)
Positive Income 58.9 94.5 56.2 68.5 57.7 74.1 76.1 37.4
2
Balance (%)
House Ownership 60.0 96.6 96.8 97.2 100 97.3 100 93.6
(%)
Owns Agriculture 14.0 64.6 44.3 19.6 84.1 55.0 63.2 57.5
Land (%)
Member SHG(%) 22.8 25.7 4.1 6.5 0.0 39.6 1.9 35.6
Taken loan past 5 74.0 13.1 23.3 16.4 11.8 52.3 61.7 51.6
years(%)
House 34.4 6.3 11.9 3.7 9.6 32.3 50.2 31.1
Improvement in
past 5 years (%)
1. Number of members in household including self
2. Based on (Monthly Income - Monthly Expenditure), represents % that have a positive balance monthly
 

31
4.1.2 House Ownership
The data on the ownership of house and the average values of house owned by the sampled
households are presented in Figure 4 and 5. The results of the study shows that 90 % of the sample

Figure 4 Ownership
Figure of of
4 Ownership house in in
house rural and
rural semi
and semi Figure 5 Average value of the house owned (INR)
urban areas urban areas
households have their own house with an average
market value of INR 306,000. Remaining 10 % of the sample households stay in the rented premises
with an average monthly rent of INR. 2,900. Among all the 8 states, Tamil Nadu registered
significantly low rate (60%) of house ownership. Among the three socio economic categories, the mid-
high income category is seen to be less likely to own a house. The market value of house owned by
the mid- high income category of households (INR 544,000) is twice compared to that of the poor
households (INR. 207,000).

4.1.3 Monthly Income

.0002
.0001 .00015
density
.00005
0

0 10000 20000 30000 40000 50000

monthly income

Poor Marginal
Mid-high

Figure 6 Household monthly income

The data on the household monthly income is presented in figure 6.

The overall average monthly income of all the sampled households was INR 6,200. Odisha recorded
the lowest mean monthly income of INR 2,900 and Uttarkhand recorded the highest mean monthly
income of INR 8000. The mean monthly income of households for the three different socio economic
categories of poor, marginal and mid high income households are INR 3900, INR 6045 and INR 9700
respectively.

4.1.4 Household income pattern

The income patterns of the three socio economic categories of households are presented in Table 7.
It was found that most of the mid-high income households (46 %) had a reliable monthly income when
compared to the marginal (33%) and the poor (30%) households. Most of the poor households
depend on the daily wages and ad hoc income when compared with the other two categories. From
this it can be inferred that the mid-high income households are better placed in terms of being able to
repay a longer term housing loan because of their reliable income pattern. In other words, we can
also interpret that 46 % of mid-high income households, 33 % of marginal households and 30 % of
poor households has the better reliability for getting a housing loan.

32
 Table 6 Income pattern

Income frequency Percentage Income

Poor Marginal Mid-high Overall
Monthly 30 33 46 33
Fortnightly 18 22 21 20
Weekly 14 20 12 17
Daily 28 20 20 24
Ad hoc 10 5 1 6

4.1.5 Dependence on Secondary Income

The data on the households and their dependce on a secondary source of income are presented in
Table 8. From the data it can be found that the rate of dependence on the secondary income
increases from the Mid-high to poor households. Moreover, it is only the poor and marginal
households who are dependent on the government scheme for employment (NREGA). Hence it is
also an indicator of the fact that the primary source of income for mid-high income customers is
dependable enough to reduce dependence upon a secondary source of income.

Table 7 Secondary source of income

Secondary Percentage Income

Income Poor Marginal Mid-high Overall
Secondary 45 39 37 41
Occupation
Rent 1 1 1 1
Pension 6 3 7 4
NREGA 7 2 0 3
Remittance 3 3 2 3

4.1.6 Household monthly Expenditure

Figure 7 projects the total monthly expenditure of the households across socio economic categories,
as well as the rural and semi-urban categories. The results shows that the overall mean monthly
expenditure for a household is INR 4,900, whereas the mean monthly expenditure of poor, marginal
and mid-high income households are INR 2,700, INR 5,100 and INR 8, 900 respectively. These
figure shows that the mid high income households consume more than 3 times that of a poor
households.
.0004
.0003
density
.0002 .0001
0

0 10000 20000 30000

monthly expenditure

Poor Marginal
Mid-high

Figure 7 Monthly expenditure of the households

4.1.7 Household expenditure pattern

Table 9 projects the household expenditure pattern across various socio economic categories.

33
It was found that the proportion of spending for basic needs like food is the highest for the poor
households. The poor households spend 85 % of their income on food. The expenditure pattern on
other observed expenses seems to be almost uniform across all the categories of households. From
this we can infer that the capacity to save is better with mid high income households which is a clear
indicator for better repaying capacity for a housing loan.

Table 8 Household expenditure pattern

Household Expense Percentage of Income

item Poor Marginal Mid-high Overall
Food 85 65 50 63
Amenities & Services 19 16 13 16
Travel 4 3 3 3
Education 4 6 4 4
Health 10 9 7 8
Religion 4 3 3 2
Luxury Consumables 2 2 2 4

4.1.8 Household saving

Figure 8 presents the data on household savings. It was found from the study that 30 % of the
households across all categories, claim to save on 50

voluntary basis. Surprisingly it was found that twice as

many poor households (21 %) claim to save on
40

regular basis relative to other socio economic

30

categories of marginal and mid high income

Percent

households (12 to 13 %). The average monthly

20

amount saved by the marginal income households are

higher (INR. 510). While the mid-high income
10

household (INR 341) and Poor households (INR 359)

stands almost comparable.
0

0 1000 2000 3000

monthly regular compulsary savings
Figure 8 Household saving

4.1.9 Household saving pattern

Figure 9 indicates the household saving pattern.

The results shows that 54 % of the total

households prefer to save informal cash savings
and only 35 % of households save formally
through banks. It was observed that investment in
property and gold accounts to 5 and 6 %,
respectively. This overall trend of saving pattern
is consistent across all the socio economic
categories. Savings in cash by most households
limits the possibility of obtaining security cover on
loan extended from bank deposits.

Figure 9 Household saving pattern

4.1.10 Consumptions Shocks

A shock is an unexpected or unpredictable event that affects an economy, either positively or
negatively. It refers to an unpredictable change in exogenous factors which may have an impact on

34
endogenous economic variables. Table 10 indicates various shocks or situation for which the
households utilises the saving reserves.

Table 9 Utilization of savings to manage shocks

Shocks Percentage Savings withdrawal

Poor Marginal Mid-high Overall
Festival 69 58 34 59
Function 16 23 32 21
Education 24 28 17 24
Emergency 39 31 4 36
Agriculture 11 8 6 9
Business 5 0 6 3
Other 1 5 15 4

The results of this data indicates that a higher proportion of people in the mid-high income households
(21%) claim to have experienced consumption shocks relative to the poorer groups (16%). However,
a higher proportion of people in the mid-high wealth group (54%) were also insured against
consumption shocks relative to the poorer groups (33%).

4.1.11 Capacity to save

Figure 10 represents the balance between the income and expenditure. It was found that 70 % of the
households had an income that exceeds expenditure but only 30 % of the households save on regular
basis. The mean balance between the income and expenditure for all the sampled households was
INR 1,300
40
30
Percent
20
10
0

-20000 0 20000 40000

balance between income and expenses

Figure 10 Balance between the income and expenditure

50000

Figure 11 represents the potential of household

saving among the study sample. The diagonal line
20000 30000 40000

is where the income is equal to the expenditure.

monthly expenditure

The blue dots below the diagonal line represent

the households that have the potential to save.
From the study it was found that income
significantly exceeds even for poor income
10000

households. The study reveals that the average

income expenditure balances per month for all the
0

0 10000 20000 30000 40000 50000

monthly income

socio economic categories of sampled households Figure 11 Household saving potential

are almost similar registering the values of INR
1,220, INR 950 and INR1, 080 for poor, marginal and mid-high income households respectively.

35
4.1.12 Household credit
Figure 12 indicates the proportions of household loans taken by the households under the three
different socio economic groups.

 
Figure 12 Proportion of loan taken by the households for various purpose

The study reveals that the loan taken for emergencies (likely medical) consistently represents highest
proportion under all the three categories of households. The mid high income households tend to take
more business loans, whereas the poor tend to take a relatively higher proportion of loans for
agriculture, daily needs and festivals. The proportion of land /home loan increases with the increase in
income.

Figure 13 represents the value of loan taken by the households. The overall loan value ranges
between few thousand rupees to three and a half lakh rupees. For wealthier income groups, home
loan is the second highest value loan and it accounts to an average value of INR 1.75 lakhs. For
lower income households, land or home loan is the highest value loan accounting to an average of
INR 0.5 lakh.

Figure 13 Value of loan taken by the households

36
4.1.13 Loan providers
Figure 14 shows the proportion of loan provided by various sources for the households. The results
show that the informal money lenders have the largest market share across all the socio-economic
categories. MFIs capture only a very proportion of the market. The proportion of bank loans is higher
for the higher income segment.

Figure 14 Loan providers

Figure 15 represents the value of loan provided by different lenders to the sampled households under
three different socio economic categories. Banks universally provide the highest value loans for all the
three different socio economic categories of households. The loan value of bank loan ranges between
INR 50,000 to INR 175,000. The mid high income category of households have access to the largest
ticket size loans.

Figure 15 Value of loan provided by different lenders

4.1.14 History of expense on housing

The data on table 11 highlights the characteristics of households who have purchased a new house
or improved their existing house in the past five years. The table compares the demographic profile of
households who have not made an expense on housing in the past five years with those who have
made some expense on housing.

It was found that both categories of households had similar household monthly income, monthly
expenditure, education pattern, household size and age group. Nevertheless, the households who
made housing improvement or purchase in the past 5 years had more predictable source of monthly
income, a stronger secondary occupation profile and lesser cash saving habit when compared with
the other group of households. It can thus be inferred that greater the predictable source of income,

37
higher would be the investment rate in fixed assets like house. This in turn leads to lesser %age of
cash savings when households spend for purchasing or improving their house.

Table 10 Households making housing purchase/improvement vs. Households not making housing purchase/improvement

Households making housing Households not making housing

purchase/improvement (in past 5 purchase/improvement (in past 5
Year) Year)

Age of HH head (yrs) 43.6 42.3

HH Size 4.85 4.62
Education of HH Head
None 45.0% 41.8%

Primary 24.1% 23.4%

Intermediate 13.4% 14.7%
Above Intermediate 17.5% 20.1%
HH Income (Rs, Month) INR 5,939 INR 5,807
HH Expense (Rs, Month) INR 4,738 INR. 4,861
Sources of Income

Primary Occupation 93.6 % 97.4 %

Secondary Occupation 50.1 % 37.9 %

Rent 1.3 % 1.2 %

NREGA 1.1 % 3.9 %
Remittances 6.6 % 1.4 %

Receive Monthly Income 21.2 % 11.9 %

House Ownership Spouse/ Parent 26.0 % 15.6 %

Spouse/Parent decides Asset 18.8 % 10.9 %

Purchase
Decision to Save

HH Head 69.8 % 81.6 %

Others 30.2 % 18.4 %
Savings in Cash Preferred Mode 27.6 % 45.6 %

Member of Self- Help Group 23.1 % 15.5 %

Has savings to cope for shock events 51.2 % 33.7 %

5 Market potential for housing finance

From the results of the study obtained, the following aspects have been critically viewed to assess the
market potential for housing finance to low income households.

 Household capacity to avail credit

 Market Demand
 Required loan size
 Affordable EMI
 Scope for formal lending institutions

5.1 Household capacity to avail credit

The capacity to take a housing loan can be influenced by factors like assets for collateral, capacity to
make timely repayments, reliability of loan repayment and access to formal credit institutions.

 Assets to serve as collateral: from the individual survey it was found that 90 % of the sample
households owns their house and more than 50 % of households have other immovable

38
 properties which can act as collateral in favour of influencing a housing loan.A similar situation
was also found among KGFS customers, with 88 to 98 % of KGFS beneficiaries owns a house.

 Capacity to make timely repayments: from the individual survey it was found that 46 % of mid-
high income households, 33 % of marginal households and 30 % of poor households had
constant monthly income.A similar situation was also found with KGFS customers, where 33.7 %
of households listed above the poverty line category had constant monthly income, but only 13.1
% of KGFS households listed below the poverty line had a monthly income flow.

 Reliability of loan repayment: It was found from the individual survey that 70 % of the
households had incomes that exceed expenditure indicating the possibility of surplus in those
households. However, it has to be noted that only 30 % of the households save on regular basis.

 Access to formal credit institution: It was found from the individual survey that 34 % of
households had established access to formal credit institutions.

5.2 Market Demand

Figure 16 and 17 represents
the market potential for home
loan and home improvement
loan from the individual
survey conducted

It was found that the demand

for home improvement loan is
much higher than of the
demand for home loan in all
the states except for Odisha.
In Odisha, both home loan
and home improvement loan

saw similar demand. The Figure 16 State wise market potential for home and home improvement loan
demand for home loan is for the next few years
literally nil in the states of
Uttar Pradesh and Bihar. Rajasthan registered the highest market potential for home loan with 37.14
% of the surveyed households intending to take home loan in the next few years. With regard to the
potential market for home improvement loan, the states of Maharashtra and Tamil Nadu were in the
forefront with more than 70 % of the surveyed households intending to opt for it in the next few years.

Figure 17 Market potential for home loan according to income categories of

households and Rural & Semi Urban categorisation

39
On the other hand, the demand for home loan and home improvement loan is approximately double in
semi-urban areas when compared with the households in the rural areas. The demand for home loan
or home improvement loans did not show any significant variation across different socio-economic
categories.

5.3 Required loan size

Table 12 and 13 listed below gives us the average size of the home loan taken by the households.
From this we can infer that the average maximum amount of loan required by the households for
home purchase is around 2 lakh rupees. Among the states, Maharashtra registered the highest
average home loan requirement of INR. 187,153. The least average home loan requirement was in
the state of Madhya Pradesh with a value of INR 36,111.

Among the three income categories of households, the mid-high income households registered the
highest value of home loan amount which was close to INR. 2 Lakhs, whereas the poor and marginal
income households had taken a home loan amount of just around INR. 50,000. It can hence be
assumed that the required loan size for these low income households would be in the range of
INR 50,000 to INR 200,000. However, this is not an indicator of the total cost of house and land on
which the house is built.

As per the findings of Minakshi and Stuti (2010), the cost of constructing a pucca structured house in
rural areas is estimated to be around INR.300 per square feet, considering the fact that most
households wanted a house of area in the range of 300 to 400 square feet, the construction cost
wouldbe INR.90,000 to 120,000.

Table 11 State wise average amount of home loan taken by the surveyed households

States HH who have taken loan for Average amount of loan taken
purchasing land/home in the past (INR)
5 years (%)
Tamil Nadu 12.9 103930.20

Madhya Pradesh 10.7 36111.11

Rajasthan 7.5 74250.00

Uttarkhand 14.3 53000.00

Uttar Pradesh 9.2 75923.08

Odisha 4.1 12642.86

Bihar 8.8 41480.00

Maharashtra 11.3 187153.80

Table 12 Average amount of home loan taken by the households according to the income categories

Poor Marginal Mid-High

HH who have taken loan for purchasing 7.2 11.3 13.3
land/home in the past 5 years (%)
Average amount of loan taken (INR) 68,250 49,375 180,885

40
5.4 Affordable EMI
From the above paragraph it can be inferred that home loan requirement of the studied households is
in the rage of INR 50,000 to INR 200,000. Moreover, the affordability limits of the household to pay a
monthly EMI for these kinds of loans would be around INR1000 per month. This is clearly evident
from the monthly saving capacity of households (Table 14 and 15).

Table 13Monthly saving capacity of households found from individual survey

Mean Monthly Income (Rs)

Poor Marginal Mid-high
Rural 3997.87 6738.36 9840.73
Semi-Urban 3639.84 4452.79 9296.67

Table 14 State wise monthly saving capacity of households found from individual survey

Monthly Income ( INR) Monthly Expenditure (Rs) Monthly Savings

Tamil Nadu 7,385 5,993 1,392

Madhya Pradesh 7,475 3,954 3,521

Rajasthan 7,245 6,927 318

Uttarkhand 7,994 7,229 765

Uttar Pradesh 4,815 4,104 711

Odisha 2,855 1,906 949

Bihar 6,569 5,038 1,531

Maharashtra 4,728 3,970 758

5.5 Scope for formal lending institutions

 

From the insights gained from the individual survey, it was found that the informal lending is the
biggest source of loan to our study households (Section 4.1.14). They cater 60 to 75 % of
households’ loan needs. The following figures 18 and 19 represent the business of formal and
informal sector players in this space. This implies that there are huge market opportunities for the
formal sector players to venture and double its current market presence.

Figure 19 Amount of lending - Formal vs. Informal Figure 18 Percentage households covered by formal
sources vs. informal sources

41
6 Conclusion
From the study we can broadly conclude that

 The requirement of home improvement loan would be more than that of the home loan
requirement

 The required home loan size for low income households would be in the range of INR50,000
to INR 200,000

 The affordable EMI for the low income households would be around INR 1000

 There is scope for formal credit institution to approximately double its market presence in
lending low income households.

42
Proposed Structure for enabling
housing microfinance under a
JLG/SHG Bank/HFC Linkage
Model with support from the NHB

43
1. Background of the Bank-SHG Linkage
Presently, banks have a large SHG linkage program across the country primarily supported by
NABARD. In this, banks partner with NGO-MFIs that collect customers in the form of groups, and
inculcate savings behaviour amongst the borrowers. Subsequently, after some track record in savings
has been established, the borrowers are eligible to obtain a loan from the partnering bank. Over 95
million poor rural households are now part of thisprogram. The program has reached out to a total of 8
million groups and accounted for INR 27000 of savings corpus and a credit outstanding of INR 40,000
at of FY 2012-13.

2. Structure of the Proposed Program

It is proposed that the NHB will train existing NGO-MFIs in housing and based on the proposed
underwriting guidelines, the NHB will facilitate bank lending to the households. The bank will directly
lend to the households identifiedby NGO-MFI. The NGO-MFI will provide provides first loss and the
NHB provides second loss. IFMR Cap will support in the identification of good quality MFIs and
provide on-going monitoring and surveillance services.

Funding 
 
from Bank

SHG/  First Loss  Second Loss  Bank 

JLG  MFI 
from MFI  from NHB 
Collections 
Members 

Second loss 
facility, 

Origination,  Identification,  Training  Funding to 

Role  Monitoring & 
Collection  from NHB  SHG/JLG 
Surveillance 

Stakeholder  MFI  IFMR Capital  NHB Bank 

Figure:Structure of program and role of stakeholder

IFMR Capital can identify and propose a prospective partner (MFI) for a partnership with a scheduled
commercial bank (Bank) for the purpose of originating housing microfinance loans for lower income,
informal sector customers. The MFIs will be chosen after through due diligence on the entity and
evaluation against stringent underwriting criteria proposed in the earlier part of the study. IFMR
Capital will share a detailed due diligence report and a copy of the rating rationale with NHB and the
Bank.

Once identified, MFIs recommended by IFMR Capital would be chosen to participate and originate
loans on behalf of the Bank. The Bank would extend a line of credit to clients of low income
households who are customers that have previously been trained and assessed by the selected MFI
for the purpose of micro lending under group liability models. The MFI would assess the KYC
documents and complete all other documentation required for this transaction on behalf of Bank. The
assets would be originated directly on the Bank’s balance sheet.

44
It is proposed that the MFI should service the loans until maturity and ensure that clients repay
according to the specified repayment schedule. This is to ensure that the MFI is incentivised to create
high quality assets for the bank. Further, IFMR Capital will conduct regular monitoring and
surveillance visits to make sure that the repayments are done according to the specified schedule.
Based on IFMR Capital’s experience in the past with a guarantee program arrangement with the
Asian Development Bank, we would like to propose a structure that blends appropriate mechanisms
for alignment of incentives and rigorous risk management processes.

The proposed structure for the transaction is as under:

Proposal MFI to originate and service loans to be booked on the Bank balance
sheet.
Role of MFI
a. Identify, originate and service loans on behalf of Bank undera
mix of group liability and individual lending models.
b. Ensure high quality of origination
c. Ensure repayment is made to Bank according to the specified
repayment schedule
d. Collect guarantee fee from the borrowers to be payable to and
the NHB.
e. To provide first loss of 5-10% of the outstanding at any point of
time.

Role of IFMR Capital a. Identify MFIs who can originate and monitor high quality clients
for Bank
b. Carry out regular surveillance and monitoring till an agreed
period of time.

Role of the NHB a. To provide second loss guaranteesto the extent of 50% of the
portfolio outstanding at any time.
b. To provide capacity building support to the MFI staff

We recommend that the NHB’s credit support is limited to 50% and is

available after the first loss is exhausted. This ensure (i) skin-in-the-
game for the Bank, which improves origination / monitoring quality
and (ii) better usage of the NHB’s support in facilitating a much larger
volume

Role of Bank To provide a pre-agreed volume of funding to the MFI to originate

housing loans for the existing MFI customers.

Security to the Bank
 5-10% of portfolio originated by MFI to be provided as First Loss
Default Protection(FLDP) in the form of a cash collateral to the
Bank
 50% of the portfolio outstanding to be provided as Second Loss
guarantee by the NHB

3. Role of Stakeholders in Detail

3.1. Role of MFI
The MFI will have to pass through a rigorous due diligence process of IFMR Capital. Post clearance
from the NHB and the Bank for managing its housing loan portfolio, MFI would directly originate loans
on Bank’s books of accounts. It would set up additional procedures required to be adopted for the
purpose of housing loan with adequate support from the NHB. The MFI would assess the KYC
documents and complete all other documentation required for this transaction on behalf of Bank. The
MFI will place a cash collateral as first loss guarantee to the extent of 5-10% of the total outstanding
at any point of time. MFI will continue to service the loans until maturity on behalf of Bank. All

45
disbursements and collections would be made by MFI according to their pre stated standard
operations and processes.

3.2. Role of IFMR Capital

IFMR Capital’s role would be to conduct a due diligence and propose MFIs identified in partnership
with the NHB to originate and manage a portfolio for Bank. MFIs would be recommended after they
pass the rigorous due diligence by Origination Team and get an approval of Investment Committee at
the Bank and the NHB. IFMR Capital would further undertake regular surveillance and monitoring
after an MFI starts servicing the portfolio till its maturity. A rigorous surveillance and monitoring report
based on the underwriting framework as detailed above would be submitted periodically.

3.3. Role of the Bank

Post IFMR Capital’s proposal of partnering with an MFI, the Bankwould extend a line of credit to the
low income households who form part of the group which is promoted, trained and assessed by the
same MFI for lending under group liability models. Housing loan portfolio is originated directly on the
Bank’s balance sheet. Continuous funding support to the MFI after a positive monitoring and
surveillance report from IFMR Capital would be helpful in continuing the relationship with the MFI.
Such partnership would be beneficial in reaching out to existing and also new clients. The partnership
network could also be potentially used where the MFIs could act as Business Correspondents
overtime and provide complete financial access to the clients.

3.4. Role of the NHB

The NHB would provide second loss guarantees to the bank to extend loans to the customer of the
MFI. The guarantee would cover the principal and the interest shortfall up to 50% of each loan and to
be utilised after the first loss is exhausted. The Bank would be required to proceed for recovery / sale
of acquired secured properties once the NHB second loss is drawn down upon

The NHB would play key role in capacity building of the MFIs and continuously provide focussed
training support as well.

4. Revenue structure
Bank: Bank will determine the rate of interest that would be charged to the customers. The assets will
qualify as priority sector assets on the bank’s balance sheet.

MFI: Bank is expected to pay the cost of servicing the assets originated by the MFI. This pricing is
largely determined by the cost incurred by an MFI to originate the micro loan portfolio and service it till
maturity. It is indicated by the Operating expenses ratio (OER) of the MFI. The OER of MFIs with
efficient operations has been in the range of 7% to 15% of the average portfolio. In this regard, IFMR
Capital analyses the cost structure of an MFI for a period of last three years or since its inception
whichever is lower. IFMR Capital shall report a figure after thorough analysis along with the extent to
which it can be brought down in future to be able to manage the portfolio for Bank. The NHB can then
structure the guarantee program to encourage the MFI to reduce its operating costs over a period of
time.

IFMR Capital: IFMR Capital would incur costs on conducting due diligence and regular surveillance
and monitoring visits. While IFMR Capital will not charge for conducting due diligence, the costs
incurred in conducting on-going monitoring and surveillance will be payable to IFMR Capital by the
bank.

The NHB: NHB will charge a guarantee fee for the guarantee provided to the MFI on a loan by loan
basis.

46
Summary of Discussions during
the Workshop on “Scaling Up
Housing Microfinance”
at the Board Room, 5th Floor,
National Housing Bank, India
Habitat Centre, Lodhi Road, New
Delhi.

47
Summary of the discussions:
Purpose: The purpose of the workshop was to gather feedback and additional insights on the report
from practitioners and business oragnisations working in different areas of housing finance to arrive at
a robust model for scale up.

Attendees:The workshop was attended by various stakeholders including the NHB, the DFID, large
public sector and private sector banks, large housing finance companies and housing finance
companies with a focus on the affordable housing finance sector.

There were a few key points that were discussed during the workshop as mentioned below.

All attendees agreed to the fact that providing housing finance to the lower income informal sector
customers faced severe challenges. It was not just the lack of proof of income but also the lack of
clear titles which caused tremendous hardships for banks and HFCs to lend to this segment.

While the affordable housing finance companies have cracked the first piece of the puzzle with
innovations in assessing cash flows of the lower income informal sector borrower, there is still no
solution for the lack of clear titles.

It was pointed out during the discussions that regulatory framework has placed high incentives on
mortgage backed lending and hence any home loan without mortgage backingis not considered
lucrative by most banks and HFCs.

The failure of the existing microfinance companies in expanding their product offerings to include
housing finance was also discussed. It was pointed out that a few microfinance companies have in
the recent past set up separate housing finance companies or have started housing microfinance
business but were facing problems in going deep into rural pockets due to lack of availability of title.
Moreover, most microfinance companies have shorter tenor funding lines which do not encourage
them to lend long term housing loans. In addition, the regulatory requirement around NBFC-MFIs to
restrict their funding to income generating activities for 85% of their books also restricts NBFC-MFIs
from getting into housing finance in a large way.

For NGO-MFIs, given that their sources of funding are limited to small tenure and there is no
dedicated source of funding for housing microfinance, the NGO-MFIs have not been able to allocate
adequate resources for growing up a housing microfinance business. The lack of regulatory clarity
around the lending operations of NGO-MFIs was also brought up. While, the NBFC-MFIs were
regulated by the Reserve Bank of India (RBI), the NGO-MFIs are governed by a variety of structures
unrelated to the lending business.

The lack of experience amongst the NGO-MFIs of doing housing finance and hence the need for
adequate training was also discussed.

The large HFCs were open to the idea of funding HFCs/NBFCs/NGO-MFIs for longer tenor housing
finance loans through term loans and investment in securitisation of micro-housing loansprovided
there is clarity around such loans/investments getting refinanced by the NHB under the refinance
programme.

48
References:
Abhijit Banerjee, Esther Duflo, Rachel Glennerster and Cynthia Kinnan. (2013) “The miracle of
Microfinance? Evidence from a randomized evaluation” IFMR-CMF Working Paper, April
2013.

Akhand Tiwari, Akhilesh Kumar Singh, Anurodh Giri, Minakshi Ramji, Abhishek Lahiri, Alphina Jos
and Ritesh Dhawan. (2011) “Relative risk to the savings of the poor in Rajasthan” MicroSave,
June 2011.

Anirban Roy, Ritika Srivastava, Shayandeep Chakraborty and Swati Mehta. (2012) “Access to credit
in West Bengal post Micro-finance crisis” MicroSave, December 2012.

Raj Shukla. (2007) “How India Earns, Spends and Saves: Results from the Max New York Life-
NCAER Indian Financial Protection Survey” NCAER and Max New York Life Inc., 2007.

Minakshi Ramji and Stuti Tripathi. (2010) “Micro-Housing loans for Micro-entrepreneurs: A needs
assessment” IFMR-CMF Working Paper Series No. 38, January 2010.

MHUPA, 2011 Guidelines of Affordable Housing in Partnership (Ammended), Ministry of Housing and
Urban Poverty Alleviation, New Delhi.

Mukesh Sadana, Raj Kumar, ChrisLinder, Manoj K Sharma, Aanchal Piplani, Gaurav Sinha, Sharad
Bangri, Anant J Natu, Premasis Mukherjee and Graham A.N. Wright. (2007). Deposit
assessment in India, IFC-Micro Save, March 2011

NCAER. (2011). How Households Save and Invest: Evidence from NCAER Household Survey,
National Council for Applied Economic Research, New Delhi, July 2011.

Access to Finance Advisory Department, International Finance Corporation. (2011) “Deposit

assessment in India” MicroSave-IFC, March 2011.
Alphina Jos, Minakshi Ramji, Shivshankar.V and Stanley V. Thomas. (2011) “Relative risk to the
savings of the poor in Tamil Nadu” MicroSave, May 2011.
Anurodh Giri, Minakshi Ramji, Mukul Kumar, Nishant Kumar, Sakib Mehraj, Ritika Srivastava, Sharad
Bangari, Sonal Aggarwal and Vartika Shukla. (2011) “Relative risk to the savings of the poor
in Uttar Pradesh” MicroSave, August 2011.
Benjamin Feigenberg, Erica Field and Rohini Pande. (2011) “The Economic Returns to Social
Interaction: Experimental evidence from Microfinance” IFMR-CMF Working Paper, February
2011.
Cheryl Young. (2007) “Housing Micro-finance: Designing a product for the rural poor” IFMR-CMF
Working Paper Series No. 19, November 2007.
Doug Johnson and Sushmita Meka. (2010) “Access to finance in Andhra Pradesh” IFMR-CMF and
Bankers’ Institute of Rural Development, October 2010.
Elsy Alcala and Elizabeth Koshy. (2007) “What savings products do people want? Short exploratory
study in Tamil Nadu” IFMR-CMF Working Paper, June 2007.
Erica Field, Rohini Pande and John Papp. (2009) “Does microfinance repayment flexibility affect
entrepreneurial behaviour and loan default?” IFMR-CMF Working Paper Series No. 34,
October 2009.
Harun R Khan. (2012) “Enabling affordable housing for all – Issues and challenges” Inaugural
address delivered at International Conference on Growth with Stability in Affordable Housing
Markets, January 2012.
Jones Lang LaSalle. (2012) “Affordable housing in India: An inclusive approach to sheltering the
bottom of the pyramid” on.point, July 2012.

49
Lucie Gadenne and Veena Vasudevan. (2007) “How do women in mature SHGs save and invest their
money? Evidence from Self-Help Groups in India” IFMR-CMF Working Paper Series No. 18,
November 2007.
M.L. Sukhdeve. (2008) “Informal savings of the poor: Prospects for financial inclusion” CAB
CALLING, January-March 2008.
Ignacio Mas. (2013) “Musing on money: The household money management model of mass market”
May 2013. Available at http://www.microsave.org/files/pdf/Musings_on_Money.pdf
NSSO and Ministry of Statistics and Program Implementation, Government of India. (2010) “Housing
condition and amenities in India” NSS 65th Round, November 2010.
NSSO and Ministry of Statistics and Program Implementation, Government of India. (2006)
“Household assets holding, indebtedness, current borrowings and repayments of social
Groups in India as on 30.06.2002” All-India Debt and Investment Survey – NSS 59th Round,
April 2006. Available athttp://mospi.gov.in/national_data_bank/pdf/NSS%2059th%20Round-
503.pdf
Raj Shukla. (2007) “How India Earns, Spends and Saves: Results from the Max New York Life-
NCAER Indian Financial Protection Survey” NCAER and Max New York Life Inc., 2007.
Available at http://www.ncaer.org/downloads/recentreleases/max-ncaer-book.pdf
Ryan Maxim Rodrigues. (2012) “Dreaming big” Business India, July 2012

Websites, articles
http://articles.economictimes.indiatimes.com/2013-01-22/news/36484345_1_section-and-low-income-
group-finance-ministry-infrastructure-status

http://www.livemint.com/Politics/hDaqc3PfHKRkaFiv6ov0EP/A-market-solution-to-affordable-
housing.html?ref=editor_pick

http://www.livemint.com/Money/LiFFaUDG72kRL5ltPzFvNJ/NHB-plans-refinance-scheme-to-aid-
lowincome-borrowers.html

http://articles.economictimes.indiatimes.com/2013-01-04/news/36149057_1_hudco-affordable-units-
units-in-rural-areas

http://www.livemint.com/Money/5RTEX7q0OUbrEPJrFaQlEL/Housing-finance-sector-may-see-
increase-in-bad-loans.html

http://articles.economictimes.indiatimes.com/2012-12-07/news/35670666_1_ajay-maken-cheaper-
houses-economically-weaker-sections

http://articles.economictimes.indiatimes.com/2012-12-06/news/35647694_1_lowcost-houses-low-
cost-houses-shubh-griha

http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4712

http://www.firstpost.com/real%20estate/maken-housing-strategy-will-be-up-against-the-old-nexus-
510642.html

http://censusindia.gov.in/

50
                                                            
i
As defined by Technical Group constituted by MHUPA
ii Note: Assessing potential impact is limited to assessing the financial impact in terms of access to housing, and
impact along socio-economic aspects is not proposed to be covered.
iii As per the definition given by NSSO, ‘good’ means no immediate repairs required, ‘satisfactory’ implies minor
repairs required and ‘bad’ means the structure required immediate major repairs without which it might be unsafe
for habitation or required to be demolished and rebuilt
iv Economically Weaker Sections (EWS) - Rs 1,00,000/- as household income per annum (The Ministry of
Housing and Urban Poverty Alleviation)
v Low Income Groups (LIG) Rs 1,00,001/- to Rs 2,00,000/- as household income per annum (The Ministry of
Housing and Urban Poverty Alleviation)
vi According to the definition by the planning commission of India, the PL in terms of per capita daily consumption
for urban area is INR 32 and for rural area is INR 26.

51