MICROFINANCE PAPER WRAP-UP: “The Growth and Performance of Affordable Housing Finance Lenders in India;” by Nadeem Karmali, Guillermo Rodriguez Ruiz

In studying the growth of affordable housing finance corporations (AHFCs) in India, the authors review the history of the Indian housing market and related government policies. After independence in 1947, the Indian government acted as a direct provider of housing. Since then, the government migrated its role into being a “facilitator of housing.” Starting in the 1990s, scheduled commercial banks (SCBs) and housing finance companies (HFCs) – public entities as well as both domestic and international private institutions – assumed the role of housing financiers with the government continuing to capitalize the market. Regulations requiring SCBs to use 3 percent of their annual incremental deposits for home financing caused a rapid increase in housing construction. The government’s Pradhan Mantri Awas Yojana program, which has provided loan subsidies for low-income households since its launch in 2015, contributed to the growth of affordable housing, in particular. The recapitalization of public banks in 2017 also led to a sharp increase in AHFC activity.

To define AHFCs, the authors review credit bureau data and existing literature. They distinguish the offerings of AHFCs from “housing microfinance” and “micro-mortgage” loans offered by traditional microfinance institutions for “incremental housing construction.” Such loans typically carry similar terms to other types of microcredit, with an average size worldwide of about USD 500, interest rates of 25 percent per year and terms of 1 to 2 years. In contrast, the authors define AHFCs as non-depository HFCs (HFC-Ns) that provide loans averaging INR 500,000 (USD 6,000) to INR 1 million (USD 13,000), targeting households that “do not have reliable income documentation, are located in peri-urban areas, use the loan for the construction of a dwelling on an owned parcel of land.”

Using this definition, the authors classify 40 of the 66 registered HFC-N corporations in India as AHFCs. These AHFCs grew their portfolios by an average annual compound rate of 27 percent from 2016 to 2020, ending that period with 1.8 percent of the Indian housing finance market. The authors estimate the aggregate AHFC portfolio size to be INR 350 billion (USD 4.4 billion).

When considering loans smaller than INR 500,000 (USD 6,000), the authors find affordable housing lending in smaller cities and rural areas also has grown rapidly. From 2016 to 2020, such loans accounted for about half the number of housing loans nationwide. Additionally, the authors point out that the effective delinquency rate among AHFCs is lower than that of other lenders, indicating that “this seems a sustainable business.”

This is a summary of a paper by Nadeem Karmali and Guillermo Rodriguez Ruiz, published by the World Bank, May 2022, 59 pages, available at https://openknowledge.worldbank.org/handle/10986/37416

By Ben Greissman, Research Associate

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