During the past few years, the push for affordable housing has led to the mushrooming of several micro housing finance firms, which mostly provide loans to the informal sector. The average loan size varies between Rs 5-10 lakh.
After the crisis at Infrastructure Leasing & Financial Services (IL&FS) in September 2018, the cost of funds for micro housing companies had gone up by around 100-150 basis points. And now, after the DHFL crisis, banks and financial institutions have almost stopped lending, according to the companies.
“After the IL&FS crisis, it was tough to get funding, but now it has become impossible. The problem is acute for those who are not capitalised strongly and widely leveraged,” said Anil Mehta, MD and CEO, India Shelter Finance Corporation.
In the last few months, many micro housing companies have already shrunk their lending operations by 40-45 per cent in the absence of funding.
“The immediate impact of the present crisis is further increase in cost of funds. However, the bigger problem is that the banks are not coming forward for lending,” according to C V Rao, managing director (MD) and chief executive officer (CEO), Nivara Home Finance, a recent entrant in the micro home loan market.
According to data from the National Housing Bank (NHB), there are about 100 housing finance companies (HFCs) operating in India currently. Within the past two to three years, close to 15-20 companies have come up with a focus on lending to the informal sector, where borrowers typically don't possess the requisite documents to avail of loans from banks or bigger financial institutions.
According to a senior official at a micro housing finance company, a number of new entrant, who are not well capitalized might have to shut shops in the next six months, if the liquidity situation doesn't improve.
In the past one year, there has been a particularly steep growth in micro housing loans, giving loans to people engaged in informal sector, and who do not possess adequate documents to avail loan from banks. A typical borrower could be an artisan, driver, domestic help or daily wage-earner. What differentiates the loan from normal housing loan is the monthly repayment cycle, along with tight monitoring of the portfolio through personal contact -- a model similar to microfinance. However, unlike the microfinance model, the loan in the micro housing sector is generally granted with collateral. The interest rates charged in the loans are about 5-6 per cent higher than the prevailing market rates.