The near doubling of India’s per capita income growth (to 7.3% in 2007 from 3.7% in 1980-81) is increasingly becoming visible in the growth of demand for rural housing which, in a sense, may be considered as a barometer for the country’s progress. Accompanying this trend is the growing demand-supply gap in this sector, which is largely attributed to unavailability of customised financial products that accommodate the consumers’ needs. Financial institutions still seem to be wary of investing in this component of the economy.

Recognising this gap Development Alternatives, in association with the basin-South Asia partners and NABARD, has initiated the process of innovation and testing of Habitat Finance products for the rural areas. This process is driven by the clear recognition that to address the needs of the rural poor and middle class families and institutions, innovation is required not only in financial modeling, but also in institutional linkages/ relationships and service delivery mechanisms.

Defining the Need
The data released by the Census of India on Houses, Households, Amenities and Assets for 2001 indicates the total number of households in rural areas to be 138.27 million as against the availability of 135.05 million houses (used as residences and residences-cum-other purposes). There is, therefore, a shortfall of almost 3.5 million new houses. Also, almost 840 million people falling in the low income (up to Rs 22,500) and lower middle Income (Rs 22,500-45,000) categories and comprising almost 100 million households undertake expansion / renovation of the existing households every alternate year. These people are largely agricultural (and, therefore, seasonal) and 70% of them own less than 5 acres of land as assets. Their need of housing finance is characterised by amounts of up to Rs 75,000 (250 sq. ft house) for new construction and Rs 10,000-15,000 for renovation / expansion. Due to low income levels, the repayment capacity is in the range of Rs 500-700 per month with larger amounts payable at the end of the agricultural season. Due to a variety of loan requirements and social expenditure commitments, most households are comfortable with a loan duration of only 5-7 years. In many cases, legal titles to ownership of land are not available.

Banks’ Perspectives
A few financial institutions have indeed made a foray into the rural housing loan market. These include scheduled commercial institutions, state co-operative banks, agriculture and rural development banks and specialised housing finance companies. However, a large majority of the rural population is still precluded from accessing these finance services, largely on account of the stringent terms and conditions and inflexible approach followed to minimise the Non Performance Assets. As in the case of urban areas, the basic security often required for the loan is the mortgage of the property. In the case of farmers, the agricultural land cannot be mortgaged. In many villages, there is no clear demarcation of the land for agricultural and other purposes. Similarly, in many villages, land records may not exist to verify the title to the land. Furthermore, since the incomes are not regular, banks are often not able to assess the repayment capacity. In addition, low volume of transactions, comparatively high transaction costs, instances of repayment defaults together imply that banks have much lower profit margins from offering loan products in rural areas.

Experiments Showing the Way
The success of the Self Help Group (SHG) phenomenon has shown a new direction to the rural housing finance market. Several institutions are already experimenting with newer models for delivering housing finance to the rural poor. Some innovations already being tested to iron out the above-mentioned barriers are:

• Group-based lending: Loans are provided to either already existing or specifically created SHGs for housing finance purposes. In these SHGs, groups are provided loans who, in turn, allocate them to the members. Since it is a group loan, the bank deals with the group as a whole and this reduces its transaction costs.

• Livelihood enhancement and repayments: Access to habitat finance by rural communities usually follows income stability once the livelihoods have been secured and livelihood loans largely paid off. Thus, composite livelihood-housing loans are being implemented on a trial basis.

• Security: Although the financial institutions need legal titles to land as security, micro-finance institutions engaged in the process have begun to accept certificates from the Panchayats as an adequate proof of title to land.

• Technical services: In order to ensure appropriate utilisation of the loan and to promote the use of cost effective and efficient technologies, technical service entities have been formed for construction management, procurement and design services.

Innovative Habitat Finance Products and Mechanisms
Most of the above-mentioned experiments have been carried out in the south Indian states. However, in the rural areas in north India, such habitat finance mechanisms have not been attempted. Based on strong ground level understanding and in association with local banks, Development Alternatives has developed finance products to address the needs of varied segments of the rural society.

Livelihood-linked Habitat Finance
The product proposes the introduction of a livelihood credit prior to a housing credit service. It will be a series of subsequent loans for increments made to the house, interspersed with livelihood loans.

• Special housing self-help groups called H-SHGs constituted by those families in need of credit support for housing will be formed. This group will have a single loan account and loan amounts will be disbursed to individuals through the rules of the group

• The families will save via the lock-in mode for the purpose of accessing housing credit

• Livelihood loans ranging from Rs 3000 to Rs 10,000 at 11% annual interest rate will be disbursed to the families on the basis of track records interspersed with housing loans ranging from Rs 10,000 to Rs 49,500 at 9% interest rate

• The innovation here is splitting the repayments as per the income flows of the rural families – 70% being the equated monthly installments (EMI) and 30% being the equated quarterly installments (EQI). The maximum pay back period is 7 years since the learnings from the field state that rural families, especially in this segment, cannot afford loans beyond this time period and the result is default cycles

This loan, meant for the poorest segment that does not really have substantial or adequate collateral, forms the core of the product.

Technical Services Linked Habitat Finance
Often the inferior habitat technology used by rural families requires subsequent repair works year after year. Eventually, these short-term costs turn out to be much greater than one-time expenditure on housing when observed over the life-time cost of the habitat. Similarly, in the absence of technical services for construction, even those who are marginally better off than the poorest are also unable to utilise their finances optimally in the rural areas. The other important aspect is that the rural middle class needs just a little top-up amount to upgrade or finish their houses. A single-window where such services are available is rare but necessary. Following the above premise, the second product addresses the issue of availability of technical services along with financial ones.

• This product again offers a scope for taking incremental housing loans to the rural middle class, ranging from Rs 10,000 to 49,500 at an annual interest rate of 9.5%

• The maximum pay back period here also is 7 years for the same reasons stated above

• Three guarantors will form a part of the system for peer pressure mechanism

• This product is also offering a savings option to families but on an individual basis

• Here, technical quality certification measures will be followed in a very stringent manner

These products are currently being field tested in Bundelkhand, a backward region in India. Tie-ups have been made with the local banks, including the State Bank of India.

In both the products, non-life insurance has been incorporated to minimise the risk to the bank. The insurance premia have been included as part of the EMIs. In order to ensure that the products are tried out in real-time conditions without placing the local bank at a risk of non-repayment, DA has also deposited with the bank an amount equal to the consolidate principal loan amount given by the bank. The bank will be able to utilise this deposit to cover its loss in case of a default.

The field testing of these finance services has begun only recently and rich learnings are expected. Let us all hope that the model works and the rural poor have as much of an opportunity to stay in good living conditions as any of us on planet Earth. q

Udit Mathur
umathur@devalt.org

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