By Mohammed Irfan, IFMR Capital
This post is part 1 of a two-part blog series.
Home ownership is an important aspiration for all of us. A house is more than just a roof over one’s head. Households derive dignity and pride from their homes and in addition, there is also a transformational aspect of housing in terms of health and sense of security. In rural areas, a house is not just shelter for a family but provides multiple benefits and serves as an integral part of the livelihood as a workshop, cattle shed, or grain store.
Rural housing and pattern of house upgradation
There are multiple motivations behind the size, type and pattern of rural houses. Apart from basic considerations such as family size, several other factors such as the continuously changing and emerging requirements of livelihoods, pattern of income and savings of the household, availability of construction material and labour attain greater significance in this context as compared to that for an average urban family.
The house of a low-to-middle income family in rural area undergoes continuous upgradation in the form of house improvement, extension or construction. Continuously emerging livelihood requirements also require upgradation/improvements to housing. These could be making amends to the tin sheet over the cattle shed, mending the walled enclosure that is used to stock the harvest, and so on. Needless to say, the historic and chronic gap in the quality of housing also pushes for housing upgradation. About 45% of the rural houses are katcha (non-concrete) or semi-pucca (semi-concrete) in nature. Moreover, a significant 65% of rural households lack basic sanitation facilities1.
The household’s ability to save for investment in housing also determines the pattern of building a house. A household, depending on income from agriculture and unorganised wage labour or small businesses, finds it difficult to accumulate lump sum investments and instead, saves incrementally. Such a household would prefer incremental and small investments to a one time large investment (“down payment”) on housing needs.
In-house labour and free local material make rural housing unique. These subsidise the explicit cost of rural housing. However, a household can invest only some part of its total productive hours of the day in building the house, as the household is engaged in other livelihood activities too. Similarly, material like wood, mud or bricks are procured and stored. Hence, the availability of in-house labour is realised gradually and over a period of time. All these factors together make a case for an incremental or modular process of building a house in rural areas. A family would invest in constructing, extending, improving or repairing their kitchen or sanitation facilities or constructing a room for their newly-married son or building/repairing any portion of their house from time to time.
Alternate rural housing finance model
From the point of view of financial inclusion, the pattern of housing construction described above presents a completely different challenge when compared to the builder-centric, large ticket-size loan model that we are used to and that is presently offered by most banks and housing finance companies in India. Another significant challenge is the difficulty in assessing and verifying income and cash flows (and hence the repayment capacity) of rural households, which makes it difficult to offer a single, long-tenor housing loan that is common in the market at present. Rural economies are largely cash-based and there is also significant seasonality of cash flows in agriculture, animal husbandry and other allied livelihood activities. The third major challenge with respect to rural housing lies in obtaining title documents and establishing a mortgage on the property in a cost-effective manner. In the absence of proper documents, banks are often left only with the expensive option of a registered mortgage, which also puts off many potential customers.
These challenges make it difficult for a mainstream housing finance company or bank to finance the housing needs of rural households, thus leaving a large, albeit difficult, market outside the purview of formal housing finance in India. It is estimated that more than 20 million households (both rural and urban) form part of the segment with monthly household income of over INR 12,000.2
Rural housing, therefore, presents an opportunity for an alternative model to be able to reach out to remote rural areas and provide access to housing finance to the household. Considering the complexity in assessing the income and the longer term exposure to be taken, the model calls for a relationship based approach as differentiated from a transaction based approach, which relies more on data and documents. The understanding derived from such a relationship based approach also helps in designing a product suited to the needs of the target segment.
1 – Report of Housing Condition & Amenities in India (2009) by National Sample Survey Office (NSSO)
2 – Micromortgages: A Macro Opportunity in Low-Income Housing Finance (October 2010)