By Anita Kumar, Centre for Development Finance
According to a Monitor Group report there is a ‘vibrant housing market in urban India’ seen from the spectacular growth in housing finance at 36% CAGR for more than a decade. However, formal housing finance has not reached lower income groups in India, even in urban areas. This is because of the high perception of risks in lending to this income group, the difficulties of verifying incomes in the informal sector, and the high transaction costs of collecting repayment relative to the size of the loans. Despite the very limited availability of formal housing finance, families living in informal housing settlements have clearly been able to build homes, and to make regular incremental improvements to their homes.
A survey done in 2009 in Hyderabad showed that incremental housing happens over multiple stages as and when the need arises (e.g. adding a tiled/concrete roof, adding a room, laying some pipes etc.). In fact, incremental building accounts for 50-90% of residential construction in all developing countries. However, there is very little research available on how communities actually access the finance needed for these incremental improvements. The dearth of such information prevents the government and the private sector from crafting financial instruments that effectively address the needs of low-income residents.
Transparent Chennai, a project housed at Centre for Development Finance, IFMR Research, will be conducting a pilot research study with the support of Department of International Development, UK (DFID) that can help to fill this gap in existing research. We will be conducting a survey in two low-income areas in Chennai to identify sources, methods of access, and amounts of housing finance, types of incremental housing improvements carried out, rates of interest borrowers are paying, and whether sources of finance have any relationship to the security of tenure, in order to better understand residents’ needs and behaviors. Such research can help create financial products and policies that complement and strengthen the use of personal savings and extended family contributions towards housing investments, but which provide an alternative to high-cost borrowing, such as those from moneylenders. Such research will be important in ensuring that new programs such as the Rajiv Awas Yojana, which has a housing finance component, do not close off existing avenues of access to finance among residents. Over the next few weeks, as the project progresses, we will keep you updated on interesting data and insights from the field.