Mahindra Rural Housing Finance, a subsidiary of Mahindra and Mahindra Financial Services Ltd, was set up in 2007 to cater to the demand for home finance in rural markets. Between 2012 and 2019, the company has grown at a compound annual growth rate (CAGR) of nearly 50 percent, according to Anuj Mehra, the managing director of Mahindra Rural Housing Finance.
In an interview with CNBCTV18.com, Mehra spoke about the growing demand for rural housing in India and the segment’s key challenges. Edited excerpts:
What is the demand for rural housing finance in India? How do you see this segment growing for your company?
Rural housing finance is a very big opportunity. KPMG has estimated that by 2022 the housing shortage in rural India is likely to be between 63 million and 65 million units. That poses a huge opportunity for rural housing finance.
Between 2012 and 2019, we have grown at a CAGR of close to 50 percent. Currently, we are present in roughly 90,000 villages and have served 1 million customers. Considering that our parent, MMFSL, is already present in approximately 4.5 lakh villages and the country has more than 6 lakh villages, I don’t see any reason why we should not continue to grow apace.
You have entered the affordable housing segment. How do you see this business shaping up?
The affordable housing sector currently accounts for 17 percent of our loan book. We expect loans for affordable housing to account for nearly half of our total loan book in the next four to five years. Affordable housing has the potential to grow faster because it is on a relatively lower base and a bigger ticket size.
According to KPMG, urban India is likely to have a housing shortfall of 44 million-48 million housing units by 2022. An overwhelming majority of this shortfall will be in the EWS (economically weaker section) and LIG (lower income group) categories. That is the profile we are seeking to address through the affordable housing finance initiative.
This market is an adjacency for our rural housing finance business and a logical strategic direction.
How do you look at the 2019 Union Budget and its emphasis on rural housing?
More than the specifics, it is heartening to see that the government is focused on solving the challenges of rural housing and, by extension, rural housing finance.
A lot of work has already been done by the government in the area of providing (rural) housing — this budget takes this focus forward.
Tell us about your partnership with central and state governments on the Pradhan Mantri Awas Yojana (Housing for All by 2022).
The company is involved in two kinds of initiatives under the PMAY. The first is financing customers to help them buy houses built by the government under the PMAY. We have tie-ups with state governments, municipalities etc for this. The second initiative is the interest subsidy schemes offered by the government under the PMAY. Under this, after extending home loans to (eligible) customers, we claim an interest subsidy from the government through the National Housing Bank (NHB). The subsidy amount, when received, is credited to the account of the customer. I would like to add here that the subsidy scheme is extremely well thought out and appropriately designed.
Tell us about the new technology innovations which can drive the adoption of financial products among masses.
I don’t think we need to wait for the next technological innovation for financial inclusion. The building blocks are already in place. The ever growing reach of the internet, penetration of smartphones, no frill bank accounts and Aadhaar for KYC — we need to leverage these. The government even provides us with the means of “last mile connectivity”. There are more than 300,000 village level entrepreneurs who, under the aegis of the government’s “common service centres” provide all kinds of services to villagers.
Use of Aadhaar for electronic verification (biometric based) should be permitted (with the requisite processes to protect privacy concerns etc). This will make it easier, faster and cheaper to onboard customers.
What is your company’s strategy to trigger inclusive growth?
The process of home construction in rural areas is different from the urban. [In rural areas] people follow a piece-meal approach. When money from a harvest comes in, a certain portion of the house is built, the next season enables the next step of home construction, and so on. There have been customers who have built a house over six years. This is where we stepped in. We told them “instead of building your dream home over time, complete it in one go and repay us over the years”. This is why we speak about our loans as being ‘home completion’ loans. In nine out of 10 cases people in rural areas take loans for incremental construction of their home; there is very little buying or selling that happens.
Also, with regards to modification, we believe that there exists a lot of need, especially in rural areas, to undertake small repairs (roof, walls, etc.). In addition, sanitation is an important need that is now being taken seriously across the nation. These are areas where our loans make a difference. We undertook an impact assessment study with BCTA (Business Call to Action, a UN affiliated organization) to understand the impact that we, as a business, create on communities as a whole. Our study reaffirmed the fact that our customers visit the doctor less often than the village average and also believe in the need for improved sanitation. It is vital, as a business serving rural India, to ‘do well by doing good’ and our home improvement loans are a step in this direction.
There are two major barriers that deter an underserved customer to approach a financial institution for a loan. First, the fear of being rejected, and second, the inconvenience with regards to excessive documentation.
Owing to these barriers, villagers end up spending a significant portion of their income paying high interest to local moneylenders.
Our processes were therefore devised to help tackle these issues. We hand-hold with respect to documentation. We try to build trust with communities and lastly, we reach out to customers, going to their doorstep rather than waiting for them to come to us for a loan.
What are the key challenges in the rural housing market?
Our challenges fall into four broad categories:
Customer acquisition: There are no channel partners (like builders or DSAs) who can help identify customers for a rural HFC [housing finance company]. Mass media also plays a limited role in this product category. As a result the entire customer acquisition process has to be handled in-house. Typically we begin the sourcing process by holding a meeting of villagers at a central location in the village. There, our team members explain our loan products, the requirements and the process. Customers evincing interest are then met separately and the process taken forward.
Evaluation: Each loan has to be evaluated from the perspectives of credit–worthiness, legal (title to property) and technical appropriateness. Customers in rural India have limited banking habits and no credit history. Thus, credit evaluation is difficult. Over the last few years we have credited a rich database of crops grown in each area that we operate in, the likely input costs to grow that crop and the yield per acre of the crop. Using market price data, we can therefore estimate what a customer’s income is likely to be. In addition, we have estimates of likely wages for various profiles.
Product design: Because of the type of customer we serve, we had to reconfigure the basic product. For example, unlike a typical monthly EMI, we allow for quarterly and half-yearly EMIs, linked to crop cycles to facilitate easy repayments.
Customer servicing: Servicing the customer base is the biggest challenge. To give some statistics, for a book size of around Rs 6,500 crore, we have more than 950,000 customers across 80,000 villages being served by 9,000 team members. Most of our customers make cash repayments of small amounts. Thus, the team has to meet the same customer repeatedly to collect the EMIs. Even today, despite the increasing penetration of the internet, customers prefer to meet and discuss issues personally with our team members. This necessitates a large team to cater to the customers.