A migrant from rural Rajasthan, living in rented accommodation with his father, a restaurant waiter, Mr Rathod has applied for a five-year home loan from Micro Housing Finance Corporation of Rs300,000. He wants to buy a small flat in an affordable housing project and bring his wife and young son from the village to the city.

Father-and-son have already saved Rs260,000 for a down payment on the Rs564,000 one-bedroom unit. Photos of Mr Rathod’s stall, and details of its operations, will be a crucial part of their application for an MHFC loan. “ Every man should own his home,” Mr Rathod says.

Informal-sector workers and small-scale entrepreneurs such as Mr Rathod, who are paid in cash, predominate in India’s burgeoning cities. Yet when it comes to home loans, they are shunned by mainstream banks, because they lack the requisite payslips and tax returns to document their income.

It is these workers - who account for more than 84pc of India’s non-agricultural labour force - that MHFC was created to serve, in a quest to tackle the acute shortage of affordable housing for the urban working class.

The origins of MHFC go back to 2006, when Mr Rajnish Dhall, a former senior director at American Express returned to Mumbai after a decade abroad, and was struck by the housing shortage that kept more than half the city’s population in slums. Conversations revealed property developers were reluctant to build homes for urban working-class families - despite the huge pent-up demand - as the potential buyers were unable to secure long-term loans for home purchases.

Mr Dhall decided to tackle the housing finance issue, and persuaded several friends, including a retired banker and property developer, to join him. In 2008, MHFC was born.

“The entire low-income housing ecosystem depends on two things working together,” says Mr Dhall. “You need both the supply of housing - builders who have to build for this segment, and financiers, which helps the demand side. You really need both to work in tandem.”

Without comprehensive paper trails to rely on, MHFC loan, credit and verification officers make their assessments through in-depth interviews, site visits to homes and workplaces, and by analysing cash flows and family situations. It is a know-your-customer process that goes far beyond mere formalities. “We want to know as much about our customers as possible,” says Mr Dhall.

As Mr Singh serves up juices and warm veggie mix on toasted buns, Mr Akash Sant, a MHFC loan officer, grills him on the monthly rent for his small patch of sidewalk, the daily cost of ingredients and daily revenues. The data and photos are uploaded via a handheld phone to MHFC’s IT platform, making them instantly accessible to others on the team.

Mr Rathod hears that his estimated monthly profits of Rs18,000, coupled with his father’s Rs6,000 salary, are initially deemed sufficient for his proposed Rs6,345 monthly instalments. But a few days later, like every prospective borrower, Mr Rathod is interviewed again by a Mumbai-based credit officer, and receives another visit from a verification officer.

Finally, his file is forwarded to the five-member credit committee and sanctioned. Nearly 95pc of MHFC loan applications are eventually approved, which Mr Dhall says reflects the seriousness of their customers, who yearn to own a home and have already carried out their own calculations.

“Nobody takes a homebuying decision lightly,” he says. “This is a move away from very poor housing conditions to something better, and they first figure out the economics themselves. They act like our first credit officer.”

Since its first loan in 2009, MHFC has lent a total of $50m to some 6,000 borrowers employed in a wide range of informal jobs: rickshaw drivers, maids, small-scale industrial workers, barbers and even Hindu priests. Its loan portfolio has doubled in value annually for the past three years and is projected to reach $100m next year.

MHFC only finances purchases in affordable housing projects that it carefully screens for quality and security of title, and the lender is now active in 13 cities. The average price of the homes it finances is Rs700,000, and its average loan size is Rs450,000, or about 65pc of the property value.

Though MHFC will lend up to 85pc of a home’s value, Mr Dhall says most borrowers have already saved for substantial down payments. Loans can last up to 15 years but the average duration is 12. “People are very conservative on home loans,” he says. “They don’t want to take too much and they don’t want to take it too long.” Interest rates typically range from 12 to 14pc, about 2pc higher than normal bank rates.

Of its portfolio, only about 20 loans have ever become distressed, mostly due setbacks such as an illness, accident or a lost income. When borrowers fall behind, the MHFC team consults them to assess their reasons and determine whether repayments can resume in a reasonable time frame. If not, MHFC works with developers to arrange the resale of the unit, so borrowers can repay the loan in full.

“We work this out on a one-on-one basis,” says Mr Dhall. “We have a team to sit down with them and understand the issues. If we think it’s going to be a temporary situation, we don’t have to take drastic action.”

MHFC made about Rs42m in profit last year, or a return on equity of about 5pc. While that is well below the 20 to 25pc of mainstream housing financiers, it believes its return on equity will increase, to reach the industry average, or close to it, over time. “It’s not like this is a charity,” says Mr Dhall “We are here to prove that this customer is credible and this model works.”

Published in Dawn, Economic & Business, January 26th , 2015

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