Overview:
The housing finance market in India has been rapidly growing driven by a significant increase in demand for housing loans in the recent years. Market growth is primarily driven by factors such as urbanization, population growth, and rising income and affordability levels. Housing finance AUM has grown from $83 B in 2012 to $322B in 2022. Market size estimates presently stands at ~₹ 25 lakh Cr out of which affordable housing loans constitute more than 50%., Mckinsey estimates that housing loan market in India is expected to grow at a 15% CAGR for the next 5 years to reach an AUM of ₹ 50 lakh cr.
Sectoral Problems Persist:
Though the sector has been growing significantly during the last 2 decades, the affordable housing category continues to be significantly unaddressed. It is evident that while India has more than 350 million households the number of affordable housing loans are less than 10 million. The reasons for this low penetration are multi-fold. Some of them are:
- Credit risk evaluation in Tier 2+ cities entail a greater understanding of local market and local informal networks to fully evaluate implication of multiple laws (which may vary from State to State). Further, physical verification continues to be a challenge for lending entities due to bandwidth constraints and limited resources.
- In the semi-urban/rural market, lenders also must maintain large, dedicated teams for origination and collection of loans. This poses operational challenges.
- While better penetration has been made possible through smaller NBFCs offering better TAT and servicing, interest costs of these housing loans tend to be upwards of 18%.
- Overall customer experience is also another challenge as each transaction has multiple layers served by agents, DSAs and marketplaces. While these players contribute to the origination funnel for lenders and serve as lead-generation engines, most of them use traditional methods which lack customer orientation and user-friendly experience. Needless to add that these traditional models necessitate significant deployment of feet on street for sourcing resulting in high customer acquisition costs which further limits banks’ expansion into Tier 3 / 4 cities.
Considering the opportunity size and the challenges faced by lenders in addressing the large TAM, we believe that there is significant scope for a tech platform that can solve for this. Such a platform could solve for customer experience challenges, by being not only interactive but also provide a better experience. Further, leveraging advanced technology for decisioning algorithms, property analysis and checks & underwriting algorithms could significantly change the cost economics for banks.
For attaining scale and growth with the right business economics, there is a need to move away from manual processes and replace it with technology driven solutions spanning origination, underwriting, servicing, and collections.
Room For Opportunity:
Given the gaps as detailed above, some of the emerging business models evolving in this space are highlighted below. Some of them such as agent led technology systems, property analytics software and co-lending infrastructure can change the sector structurally and create value to the eco-system
- Origination Marketplaces: These platforms generate leads through marketing campaigns. Potential buyers typically land on the platforms initially to see their credit-scores (which are typically offered for free) and see the financing options available for them. The platforms then aggregate details of such interested users and provide them to financial institutions, taking a commission of about 1-3% (depending on the category) if the lead gets converted into a loan.
- Agent Led Technology Platforms: Typically use feet on street model and digitize the customer journey with agent assistance. Typically, CAs, wealth managers, insurance agents are enrolled for this purpose
- Property Analytics: Leveraging AI/ML to collate, secure and assess property data for decisioning on underwriting the housing loans We believe this software utility can be offered as a SaaS based product to Banks and HFCs.
- Co-Lending Platforms: Providing the tech infrastructure for Banks and NBFCs to co-lend with other niche NBFCs having reach. This will also solve the problem of high interest rates of smaller NBFCs
- Down-payment models: Platforms offer down-payment assistance in form of an unsecured loan for a certain time-period.
Impact and Way forward
Overall, the housing sector in general and affordable housing in particular are set for expansion because of change in lifestyles, societal perspectives, government incentives and expanding labour mobility. Future forecasts show that these patterns will persist. Moving into larger residences is more likely as income grows and affordability rises. Housing as an asset will continue to be a priority for customers.
Regulatory focus has also significantly increased in this area to boost affordable housing market (Union Budget 2022 has allocated ₹ 48,000 crore to complete 8 million houses by FY23, Credit Linked Subsidy Scheme which is a component of PMAY and provides interest subsidies on home loans), as well as the RBI impetus on co-lending has paved the way for banks to partner with NBFCs in the affordable segment. This sector also promises easy access to refinancing and securitization solutions, as NBFCs and financial institutions look to achieve priority sector lending requirements by investing into securitized assets.
Some new-age start-ups such as Paisabazaar, BankBazaar, Easy Finance, Easi Loan, Home Capital and Basic Home Finance are trying to build solutions discussed above and trying to increase the penetration of housing credit in India. This would be an interesting space to watch out for and see if they can scale up the category using phygital approach by cutting down the variable costs for stakeholders, increase distribution channels, using automated origination techniques, efficiently underwrite property by using data, and improve the TAT by using layers of technology and sticking together to underwrite a customer loan quickly.