Feb242021
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The experience of Caspian Equity as an early investor in affordable housing finance in India
It is not often that organisations get to shape industries and sectors. Caspian has been fortunate to have had that opportunity to contribute to multiple sectors. We played the role of a catalyst and a growth partner to financial institutions, through equity investments in microfinance institutions (MFI), affordable housing finance companies (A-HFC), affordable school finance and micro & small enterprise finance. Here we are sharing more about our learnings from investment in the A-HFCs.
Through our second fund, the India Financial Inclusion Fund (IFIF), raised in 2008-09 and managed by our colleague, Mona Kachhwaha (with Caspian from 2007 to 2019), Caspian started investing in affordable housing finance (AHF). We invested in start-ups like Equitas, Micro Housing Finance (MHFC), Aptus Value Housing Finance. Since then, Caspian has witnessed a new sector take root, grow and create its own independent identity within the broader inclusive finance space. Within last few years, AHF has also become one of the key priorities for the national govt.
Initially we were open to the idea of promoting specialized HFCs as well as encouraging MFIs to add housing finance in their offering. However, we realized early enough that most MFIs did not have the required resources or the structure to address the gap & opportunity. Significant changes were required in human resources, sales and distribution strategy, systems, nature of funding to diversify into housing. Also, their hands were full and they had to keep the growth in housing portfolio muted due to the 15% cap on non-microfinance loans under the NBFC-MFI1 regulation.
The new micro-mortgage focused housing finance start-ups offered a more compelling way forward to realize their goals in AHF. Caspian’s first investment in an HFC was made in 2009,MHFC (Micro Housing Finance Corporation), following which Equitas Housing Finance (a group company of an existing portfolio company) was launched in 2011, and finally in 2012 we invested in Aptus Value Housing Finance. Apart from these companies, Ujjivan, another portfolio company launched housing microfinance for its microfinance borrowers in 2012 and then added micro-mortgage as a separate business vertical in 2014.
Affordable Housing Finance market is constituted by two broad categories.
The affordable housing finance market, from a customer perspective, for the underserved can be divided into two broad buckets – those who can offer a mortgageable security and those who can’t. The former are buyers of housing units (either flats or land with a small structure on it) that are “formal” in nature, i.e. there is a legal title to the land and the house/building is constructed as per codified rules. The latter are residents or buyers of “informal” housing that either don’t have title to the property but they have tenancy rights or the title of the property is unclear because of various reasons.
Amongst these segments, the customers that MFIs serve tend to be residents of informal housing, with unclear or no title. MFIs offer these smaller ticket housing loans as “graduation” loans, to their tested joint liability group customers who have performed well in the past and whose incomes can be assessed. These loans are generally known as Housing Microfinance (HM).
Secured home loans availed against formal housing are larger ticket, longer term and at lower rates, thereby improving the affordability of a house for the customer. This category of home loans has come to be known as Micro Mortgage (MM).
In both cases, incomes are typically informal in nature, i.e. there is no documentary proof, requiring an assessment by the lender’s field staff based on customer interviews, neighbourhood checks and visits to workplace and residence.
Key observations from our experience of investing in the sector:
- MHFC, Aptus and the Equitas subsidiary 2 focused on providing MM to customers from the informal sector. Each of them has a unique approach that sets them apart from each other. MHFC has a project-led model, providing loans for purchase of housing units in medium to large sized developments catering to EWS and LIG3 customers. Aptus adopted a retail sales and distribution approach to reach customers in small towns and cities in the southern states of India, catering primarily to the self-construction market4.
- Pioneers who successfully experimented with a new idea in financial services typically come from a related or an adjacent space but not the exact same one. This was the case in housing finance too – an element of risk-taking combined with creativity was seen in the founders, which is often missing in those who belonged to the traditional/mainstream housing finance sector for a prolonged length of time.
- The business model viability demonstrated by the early HFCs or MFIs, for MM & HM, became the foundation for others to follow. The pioneers had the advantage of more time and space to experiment. The latter entrants are expected to perform better and scale quicker, as they have the benefit of others’ experience.
- National Housing Bank’s (NHB) early support to a few A-HFCs went a long way in instilling confidence in the sector. The experience of banks and debt investors (foreign funds, DFIs) in the microfinance sector was one of the reasons for the debt journey of HFCs to be a relatively easier one. They were willing to take some early bets.
- A decade after the first A-HFC was funded by Caspian, the data on credit and business performance is becoming measurable. There is a lot of similarity between high and low-income portfolios. The lead indicators of good/bad performance are similar too, though due to higher income volatility, provision for credit delays need to be made and this needs to be priced in. A successful organization in this space is one that has the capability to capture and track data. Since these companies are writing the book on what works and what doesn’t, they need to learn from their own experiences in real time. Data mining and data intelligence are not nice to have, it’s a must for A-HFCs.
- The potential of A-HFCs and other institutions focusing on AHF remains immense in India. There is still a lot of room for growth, especially in smaller towns. Urbanization is leading the growth in demand and with key performance metrics and success factors becoming clear, the future for this sector is bright.
Caspian demonstrated solid financial and social returns from the investments made in the affordable housing finance sector. We exited Equitas in 2016 (IPO sale), MHFC in 2018 (trade sale),Aptus and Ujjivan in 2019 (secondary sale). All these investments have yielded the fund attractive returns. On a cumulative basis, Caspian invested USD 17.5 Mn and has achieved a gross exit of USD 72 Mn from its AHF companies and portfolios.
Our experience has been captured in detail as a chapter co-authored by Ms. Mona Kachhwaha ( IFIF-Fund Manager) in the book Taking shelter: Housing Finance for the World’s Poor (https://practicalactionpublishing.com/book/2504/taking-shelter)