The biggest housing market has opened up in India, and it is in rural India. Housing finance companies are moving to villages to finance the sector in a big way, but through a model that is totally different from that of urban India.
In the last two years, the private sector has pumped in about Rs 1,500 crore in rural housing. This is almost 20 per cent of the revised estimate of Rs 8,121 crore that the government spent on its rural housing scheme — Indira Awas Yojana — in FY 13 and plans to spend in FY 14.
The crucial difference in the market is the ticket size and the collateral offered. Unlike towns, banks and housing finance companies offer money for part improvement or construction of homes to keep the repayment load on the borrowers manageable. Also, while land is used as collateral, the banks have found it is best not to possess it as this creates a scare in the market, driving away potential consumers.
"Even though we get land as collateral, I don't think we look at it for repossession. It's an issue of sentiment because it is the only asset he (the borrower) owns," explained Ramesh Iyer, MD of Mahindra Finance.
Over the last few years, leading finance companies have set up rural housing companies and offered loans to farmers with agricultural or other allied income. Mahindra Rural Housing Finance Ltd (MRHFL), where Mahindra Finance holds 87.5 per cent stake and National Housing Bank holds 12.5 per cent, started its operations three years ago. Having expanded its reach to seven states, the company now has a loan book of Rs 1,000 crore which stood at Rs 330 crore a year ago.
"Currently the book size of MRHFL is Rs 1,000 crore and we are doubling it every year. The potential is unimaginably large and we feel that by 2015 the book will grow to up to Rs 5,000 crore and we will increase our presence across 12 states," said Iyer.
HDFC Ltd, a leading player in the housing finance business, also formed a rural housing division two years ago to focus on these markets.
Two year ago, DHFL Group launched a company, Aadhar Housing Finance Ltd (AHFL), in joint venture with IFC to focus on the rural market. The company has seen its loan book grow to around Rs 400 crore over the last two years.
"The growth in the segment is around