India is giving low-income people the opportunity to buy homes by helping financial institutions create new mechanisms that allow for greater risk, such as using employers and microfinance companies as a collective point for multiple borrowers. Through these new products, 80,000 low-income homes have been sold and more than $200 million in loans have been distributed. Because of the higher risk involved in lending to them, low- and middle-income people often find it difficult to access loans in India.
Results & Impact
More than 130 developers have sold 80,000 low-income homes in cities across India, and 10 housing finance companies have given out more than $200 million in loans.
Government of India, National Housing Bank, World Bank
Strategies to address the new level of risk taken on by banks include a means of collective bargaining, in which the employer acts as a central point to aggregate credit risk, potentially incorporating repayment and interest into a wage deduction system. Financial institutions are attracted by the arrangement, which they regard as lower risk as lending straight to individuals, and borrowers can even use the leverage of collective bargaining to get a better deal. Initial research and pilot studies by inclusive economies specialists Monitor Group were followed by a five year World Bank-financed project worth $100 million. Capacity building at banks was led by World Bank experts and partners, and financial institutions were attracted by the potential for a new market among low-income people.
Cost & Value
Although pilot work and research had taken place in the years before, the project was enabled by a $100 million World Bank investment in 2013.
Running since 2013
The houses provided by the program are very small, at only 229 square feet for accommodation that's designed for families to live in. Compared to other parts of the world, that's tiny: in the UK “pocket flats,” targeted as an affordable but compact option for single, professional first-time buyers, are 400 square feet.
India is giving ordinary people the chance to own a home by supporting banks to develop new products that minimise the risks of lending to low-middle income workers.
The project, which has been financed by the World Bank and overseen by inclusive development specialists Monitor Group, has led to 130 developers selling 80,000 low-income homes in urban India, and 10 housing finance companies granting $200 million in loans to people who otherwise would not be able to access them.
It has also included working with government to change policy over how low-middle income people can get the financial support and credit they need to buy homes.
Access to housing in India is a big issue. Financing for homes is a growing market, but flats being built tend to be no smaller than 500 square feet, with a price tag of over $10,000. With finance, that’s just about affordable for a household earning $185 per month. For families earning any less, however, that’s totally out of reach — and those families constitute 85% of India’s population.
With the urban housing backlog estimated to be 19 million in 2012, it’s likely a quarter of all city dwellers in India are either homeless or living in substandard housing. The problem is only getting worse as more people migrate to India’s cities to live.
The Low-Income Housing Finance project is an attempt to rectify that. Its major aim is to build capacity in India’s National Housing Bank, as well as other institutions, to develop new products, types of collateral and risk management strategies, preparing them for the increased risk in catering to low- and middle- income people or those outside the formal economy.
The initial research into the project revealed that the components to offer low income housing exist. Developers in cities including Jaipur, Kolkata and Mumbai confirmed they were able to build units of 250 to 350 square feet, each to be sold at around $5,000 to $6,000, and a healthy demand was shown to exist among target families.
Initially, banks and housing finance companies were concerned that the cost of servicing relatively small individual transactions would be prohibitively high, and that the credit risk would be excessive. Strategies to address this include a means of collective bargaining, in which the employer acts as a central point to aggregate credit risk, potentially incorporating repayment and interest into a wage deduction system. Financial institutions are attracted by the arrangement, which they regard as lower risk, and borrowers can even use the leverage of collective bargaining to get a better deal.
An alternative for informally employed workers used a similar method, with a microfinance firm acting as the nodal point for collective borrowing.
Many of the strategies used in the program were developed in research by the Monitor Group, an inclusive markets consultancy which has now merged with US nonprofit FSG. The project has been overseen by the World Bank over three phases, in a project beginning in 2013, for which the international body committed $100 million.
(Picture: Ralf Keyser/Flickr)