The pace and the intensity of various measures announced by the government has brough us a bit closer to realizing the affordable housing dream than ever before. Unlike past schemes, the PMAY addresses the entire housing ecosystem. Well-established HFCs, however, have started witnessing slowness in their core business, partly due to increasing competition from banks and partly on account of scores of new HFCs entering the housing finance arena aggressively.


Mini Nair, CEO and Executive Director, Essel Finance Home Loans Ltd., which is a relatively new entrant into the market, throws light on the risks and opportunities that exist in a volatile market, in an interview with Shashidhar V.

What is your viewpoint on the housing finance segment in the country, especially the category that you cater to?
At present, the demand is quite high. There is a lot of awareness among the segments that we are looking at, primarily cash salaried and self employed, non-professionals. Basically, they are the taxi drivers, autorickshaw drivers, small shop owners and small contractors, those kind of self-employed people.
And, on the other side, cash salary means those who are working in a small SME/MSME kind of small shops. So, they are not having proper degree certificates, salary slips, etc. They earn their salaries as cash. And, most of these people don’t have proper banking habit.
This means that you don't have proof that you are getting the salary, and how they are spending it. So, that's the kind of customer segment that we are catering to.
And, now, there’s a lot of awareness with the PMAY scheme, the push from the government and from other agencies for affordable housing. And, the National Housing Bank (NHB) too is pushing these cases. So, there is quite a bit of awareness now among that segment that has become easier to get a loan.
Moreover, there are a lot of direct sales agents and connectors who are working in this market. So they are the middlemen. They actually connect the housing finance companies to the people out there and through them we get the business.
We get quite a bit of our business from direct cases as well, where our sales team go out and get the customer. Plus, now, there are many builders coming into this segment, both small builders and big developers. All of them are coming in because of some tax soaps or some benefits they get by doing the affordable housing projects. And, since there's a demand, they are more attracted because there is not much demand in normal housing. The market is sluggish, whereas here, there is demand and so, they're trying to get into this business.
There's some momentum happening, but it's not as expected, as in the government wants to build houses for all by 2022. If you look at the current momentum, that's not happening, because there is a huge delay in between the plan and actual execution.
And, there are a lot of housing finance companies coming into this business as well, since NHB is quite generous in giving licences. That has increased the competition. Add to that the existing bigger ones who are also now focusing on this segment because of the momentum here.

What are the trends that you see in financing the specific category that you are catering to?
If you look at the interest rates, they are going below. If you look at the risk element attached to this segment, you actually have to charge a good interest rate. Otherwise, it's an expensive proposition. It takes a long time to convert a loan, because most of them are not aware of complications of the documentation, the legal and Technical aspects of buying a house. So you, the Housing Finance Company, actually has to take care of all these. Basically, you are mortgaging that asset. So, it takes a long time.
And, also, the risk element, like delinquencies, would be much more than the conventional housing finance. If the normal housing is .5 percent, or .34 per cent, average, it will be about 1.52 percent here. It can’t be lower than that. That's what the trends are showing as well.
So, if you don’t price it properly, then you get into problems in the future. That’s one of the aspects that we are now realising as a new entrant into this market.
Market demand is there, but supply is not as expected. It's slowly happening, but it will take some more time.

Was it a conscious decision to cater to that particular segment as you mentioned earlier on?
It was, because we thought there is a lot of momentum happening, a lot of momentum by the government and the regulator. So, it's better for us, as a new company, to enter into this segment. The sales are also happening, and housing...one good advantage for a housing loan is that, always, there is an emotional attachment for one person towards his or her house. And, in most of these cases, it's a first house. So, the delinquencies would be much lower as compared to any other product. That’s still the advantage in housing segment, even if it's affordable housing.

Do you also look at providing loans against property?
No, we don’t do too much of loan against property. We do have that product. But, we usually do normal housing loan – loan against buying a new house, loan against improvement of a house, construction of houses...that's what we're focusing on.

As you said, there is quite a bit of competition from existing players, many of them large players. How are you differentiating yourself from the rest who are already entrenched in the market, and have made a name for themselves?
See, it's a difficult situation, because you can't do a lot of product innovation into segments, because it's a very simple product. You can’t do too much of innovation, like, say, NBFCs do in other products. It is not possible. And, there are many restrictions as well. Also, there is quite a bit of risk element involved.
So, in the areas where we are focusing, making a differentiation will be on reducing the turnaround time in sanctioning a case. So, we're trying to digitalise as part of a lot of online activity, the time to actually implement an online policy process, since that would vastly reduce the time in sanctioning the cases. That is one area we are focusing.
Another area is to ensure better customer service. The problem here is that, most companies take a long time to sanction and disburse the loan. So, if you can reduce the time...usually, it takes around 15 to 20 days. So, if you can reduce it to, say five or six days, ensuring the credit and the other aspects are taken care of, then that is going to be a big achievement, because that would reduce the transaction cost also.
The cost involved in processing is quite high. And, if you look at the kind of margins the housing finance companies work, it's very difficult to profit in this product for a new housing finance company. For the existing ones, it is a different story altogether. So, that is an area, being a new company, we can actually look at these areas and try to do some research and try to bring some new perspectives to the way we are conducting our business. That’s our focus area.

Many existing players are doing away with Direct Sales Agents (DSAs) because it is a heavy cost on them. What is your dependence on DSAs for your business?
We are presently depending quite a bit on DSAs. Close to 60 per cent of our business is through them. But, we are trying to reduce that dependency as we grow. As we get into tier-II and tier-III cities, while we are expanding, we're trying to get more direct business.
In a city like Mumbai or Pune, it's very difficult to get direct business. You do get, but there are a lot many DSAs in the market and everything is connected to them. So, it's better to do business through a DSA in larger cities.
But, if you go to smaller cities, you won’t need a DSA. You can directly approach a potential customer and try to get business. You have many options to do business in these smaller cities. That's what we're looking at. We would not depend too much on DSAs in these places. We're trying to reduce that dependency.
The issue with DSAs is that you get business from them, but they're, always worried about their incentives and commissions, which are pretty high. And, if a new company enters the market offering better incentives, then the DSAs will get a transfer of their customers from this company to that (company). The customer doesn't have a connect with you. And, that's a problem.

Wouldn't it be better if you focused more on tier-II, tier-III towns rather than metro cities, since your customer base is more suited to those areas?
I won’t agree to that because the major housing shortage is in the metro cities. If you look at the kind of migration happening from the smaller towns to the metros, there's a huge gap in housing. So, that is where the government has to work really hard on. Like, in Mumbai, the problem is of too many slums. So, if you have a proper, planned way of building affordable houses, houses at lower cost, this can be taken care of. And, so, that is the reason why we are concentrating on the metros as well.
The segment that we are catering to live closer to their work places, probably in chawls, slums. This segment, I don't think, would like to travel on regular basis to reach their work because most are daily wage earners, and travelling two to three hours per day would not really suit the work that they do.
So, that is one big challenge that the government has to look at. They need to provide low-cost housing in their present areas where they have been staying. Otherwise, the government has to develop the infrastructure and commercial areas of the peripheral areas as well so that people don’t spend a lot of time commuting. But, these two are not happening. That is where there is a big gap.
Having said that, it is not that we will be only focusing on metros. We will be going to tier-II, tier-III cities as well. But, then, metro cities are big markets for affordable housing. What’s actually happening is, if you look at Mumbai, the peripheries of Mumbai, areas like Palghar, Badlapur, Boisar, etc., are the ones where low-cost houses are being built.
But, can you really call them affordable? The apartments may be available for `15-`20-lakhs. Is that affordable? To a certain section of the society, that is affordable. But, to many others, it isn’t. But, that is the rate in those areas. So, if you actually ask me, that isn’t affordable housing.

So, how would you define affordable housing?
Affordable housing means having low cost houses in the city area where these people are working, and make them more comfortable to buy such houses. That is how it should happen. But, that is not happening yet.
So, what we at Essel Finance are doing is, we are opening branches in areas like Kalyan, Virar, Palghar, etc., and catering to the requirements of the local market there. There are quite a few customers from Mumbai who are buying houses in those peripheries as well. So, it is these peripheral areas where the `15-`20-lakh houses are being built.

So, that is the segment that you are looking at – the `15-`20-lakh bracket.
We are looking at less than `25-lakhs. Anywhere between `5.0-lakhs to `25-lakhs is our target.

And, as you say, you are looking at only affordable housing segment.
At the moment, yes. We are taking this year to set up our business. We will start scaling up from next year onwards. So, I will not say that we will limit ourselves only to affordable housing going ahead. Once we have the kind of scale up and the pricing advantage, we will also get into normal financing of houses. At the end of the day, you need to have a balance between the two. This segment is a lot riskier than normal housing finance.

Would you throw light on your Assets under management currently?
See, at the moment, it's very small. We should be ending this quarter at `30-`35-crores. And, we are looking at around `200-crores by the end of this year. We're not growing very fast this year. We are trying to set our base, ensure all our processes, control and, as I told you, digital...we are working on some products. And, we are trying to build branches in Maharashtra. We should be focusing on areas out of Maharashtra only next year.
At the moment, we are opening branches in Nagpur, Pune, and will follow it up with Sholapur, Ahmednagar. So, we're looking at those areas where, as we discussed earlier, the tier-II, tier-III cities where there are these kinds of houses getting built and you get the kind of customers as well who are of that range of `3.00-lakhs to `6.00-lakhs income per year. That is our customer segment. Next year, we've plans to go to Rajasthan, Madhya Pradesh, Chhatisgarh, Karnataka.

What about the government’s smart cities initiatives? Are you deriving any business from those as well?
Yes, we are. Smart cities are happening, but things are not very clear to many. Things are not really happening on the ground. If the smart cities initiatives really take off, then they'll have to find a solution for the housing also. So, that is a good opportunity for us to grow.

Where do you see the risks that you see in your business, your goal of achieving `200-crores by the year end, the clientele that you are addressing, etc? What are the challenges?
India being such a big country and a bigger retail market, achieving `200-cr is not a big issue. Even if one were to set aside the smart cities, etc., there are quite many developments happening. What we are looking at is, we're looking at properties and gram panchayats, (we are) looking at properties in some gaothan areas.
There are some risks attached to it, but then, there are some mitigants to the risk. There is a lot of construction happening in those areas. There is quite a bit of self-constructions happening. So, we are funding such cases. We are not looking at exactly these affordable projects, big projects coming in and then fund them.
We are looking at individuals, people buying houses and with the PMAY scheme, that's looking really well. So, when a Housing Finance Company provides data to NHB, the money is transferred within 2-3 months to the account of each customer in the company. So, that is happening quite okay.
That is actually a good breather for the segments that EMIs are reduced. That is also one of the reasons why more of them are coming out and buying houses. They may not be buying in these big complexes. But, they are buying houses in gram panchayats, or they are constructing their own houses.

You could also look financing Shops and Establishments as well?
That is around 20-25 per cent of our total business. The rest 75 per cent, we ensure that we provide finance for proper housing, because financing shops and establishments is a more riskier proposition. That, anyway, is a business proposition, and if that doesn't happen, if the business if not successful, then it becomes an NPA.

However, that would also depend on how you value your customer.
We do have our own way of quality checks, but at the end of the day, if there is something like demonetisation, for instance, because of which, there were many issues. And, then, GST. People who were not used to this kind of structured way of paying tax, or most of their businesses was by way of cash transactions, they had to change their business models. That created many problems.
Many companies have huge delinquencies because of these two decisions. I am not passing a judgement on whether it is good or bad. I'm not getting into it. GST is actually very good. But, it will take some time for the people to get adjusted to the expectations, and that they have to pay tax, etc. That is the only issue. Otherwise, in the long run, that's going to help us.
So we are not looking too much into lending to business establishments. If there is a good case, we will still lend.

What about your Loan-to-Value?
If you look at our LTVs basically, in our case, it's around 65 per cent. If you look at any HFCs, it is around 65-70. Some are at 50 per cent. So, you're completely secured so far as your lending is concerned.
The only issue is, if you give a 90-95 percent, and if you add, do some tweaking and devaluation, etc., then there is a problem. If there is a dip in the valuation of the property, then you are in trouble. So, that is an area that you have to be extremely careful.

Considering that most of the people that you lend to do not possess proper documentation, isn’t it a risk that you are taking?
We have a different way of doing credit analysis. We have a credit team at each branch who are trained on the products and our business and how to analyse the cases. The sales team also have an understanding of the product. So, while selecting the customers, they do a first level of understanding whether this is doable case from the overall perspective of the product, then the credit team visits the customer. In almost all the cases, we do a personal discussion. We do a personal profiling of the customer’s business, etc. The customers are not aware of it.

How do you compare to the rest of the players in terms of interest rates?
We are on a higher side, in the range of about 13 per cent to 13.5 per cent. What you need to keep in mind is that the customers in this category don’t really look at the interest rates. They look at how much they are making, and how much they can afford to pay per month. So, basically, how much you have in hand at the end of the month, and if you are charging `20,000 or `15,000, and if he's comfortable with it, he'll be okay to pay. And, we also verify to see if the person is comfortable to pay this amount or not on a monthly basis before we disburse the loan.

Do you think that such high interest rates are a detriment to your growth?
It is, to some extent. But, I think that the kind of risk I am taking, the  segment which I am addressing, I have to take care of my cost, my operational cost, then my credit cost, and my NPA. So, if you are saying there is a 1.5 per cent to 2.0 per cent NPA, and if I am lending a 13.5 per cent...as a new company, another challenge that I have is to get money. So, when I borrow from the market, I may get it at 11 per cent, or even 11.5 per cent.
So, my margins are quite low. So, within that I have to ensure that I'm doing a profitable business. That is one disadvantage for the new company. But, what happens with most of the new companies is that either they get capital or they get investment from private equity. But, this is the most expensive source of money, isn’t it? Because, expectation on capital or private equity is more than 16 per cent or 17 per cent return on their equity. So, when this kind of expensive money comes to us, if you don't have a proper margin to work on, then that won't be a sustainable business.
And then, with the kind of sales force, credit personnel, collection team, etc., it is expensive. You have to ensure that you are recovering your costs as well.

How do you see the future of your business growth potential, and how confident are you of reaching your targets?
I am quite bullish because there're quite a lot of new things happening. As I told you earlier, it is a slow start for affordable housing. But, now, with the kind of tax incentives and GST reduction, etc., lot of builders are showing interest in these projects. Many reputed builders too are getting into affordable housing and they are coming out with big projects. So it's more comfortable for a Housing Finance Company to lend to a builder rather than going through each gram panchayat buildings, etc.
Another area is there is this private-public partnership happening, the PPP model. That is also coming up in many smaller cities. So, there, the government is giving land, or otherwise, they are pooling land from various customers. They already have customer base built. That's how they work based through Cooperative Societies, etc. There too there is a lot of comfort.
The government actually gives some portion of `2.5-lakhs per customer as advance to the builder, who then has the comfort of having the money to start the construction. As you know, the major concern for the builder is the land cost, the construction cost, and the time taken for construction. But, even here, new technologies and methods are coming in that are helping the builders to complete the construction faster.
So, if this momentum continues for the next 3-4 years, you will see a lot of improvement in this area. RERA and GST have been the game changers, if you ask me. They brought in more transparency to the real estate market.
Going ahead, you will see quite a bit of consolidation happening. Small builders who were working on cash basis will not be able to sustain and will have to sell projects to larger developers. So, in my opinion, things should start picking up from 2019 onwards.
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“There are a lot of housing finance companies coming into this business as well, since NHB is quite generous in giving licences. That has increased the competition.”

“At the moment, we are opening branches in Nagpur, Pune, and will follow it up with Sholapur, Ahmednagar. So, we're looking at those areas where there are these kinds of houses getting built and you get the kind of customers as well who are of that range of `3.00-lakhs to `6.00-lakhs income per year.”

“RERA and GST have been the game changers, if you ask me. They brought in more transparency to the real estate market.”