Gruh Finance: Serving the Underserved in the Housing Sector

The food at Narayandas Futarmal’s roadside eatery at Vasna, Ahmedabad, in the western Indian state of Gujarat, is very popular with the locals. Located right outside the state government’s sprawling agricultural produce market, the eatery, run by 67-year-old Futarmal and his two sons, ages 28 and 23, serves puris (fried whole-wheat tortillas) with potato curry and lentil cutlets to a steady stream of farmers and wholesale dealers for around 25 U.S. cents a plate. For Futarmal’s family of six, which currently resides in a rented 200 square-foot home, the eatery fetches a monthly income of around US$1,100.

In September, Futarmal and his sons applied for a housing loan at Gruh Finance to buy a 450 square-foot home priced at US$14,396. They were not sure if they would be granted the loan. Typically, mortgages require a plethora of financial documentation, including proof of income. The Futarmals had no tax credentials to back them. But at Gruh Finance, they were able to secure a loan of US$8,373 at 12.7% interest per annum. The family dipped into its savings for the upfront down payment of US$5,905. With a 20-year repayment tenure, Futarmal has to pay an equated monthly installment (EMI) of US$96. “It’s a humbling experience every time we give [someone] a cheque [towards buying a home],” says Sudhin Choksey, Gruh’s managing director.

Gruh Finance, formerly known as the Gujarat Rural Housing Finance Corporation, is India’s first specialized rural mortgage entity for the underserved and informal sector. It was conceived by H.T. Parekh, who set up the Housing Development Finance Corporation (HDFC), India’s leading mortgage finance firm. Along with IFC Washington and the Aga Khan Fund for Economic Development (AKFED), HDFC set up Gruh in 1986 with a clear mandate to provide mortgage finance to the economically weaker sections in rural India.

Over the years, while Gruh has expanded its customer base, it draws a large number of homebuyers from the bottom of the pyramid. Around 30% of Gruh’s loan disbursal is to those in the informal sector in both rural and urban India. The salaried class, professionals and small businessmen constitute the rest. “Gruh has cracked the model of providing loans to low-end customers. It provides the fuel for driving the low-income housing development,” notes Ashish Karamchandani, partner at the Monitor Group, a global management consulting and merchant banking firm.

A Role Model

According to industry professionals, Gruh has redefined personal selling. Rajnish Dhall, managing director and CEO of Micro Housing Finance Corporation, a Mumbai-based new entrant in which Monitor has a stake, says that his organization is modeling itself on Gruh. “Unlike many players who are purely business driven and lack passion, Gruh has an element of empathy. We admire their track record and their [financial] numbers speak for themselves,” Dhall notes.

Taral Bakeri, partner at Ahmedabad-based Santosh Associates, says his firm has built 3,000 units ranging from 500 to 600 square-feet since 1995 for the low-income group. According to Bakeri, his customers seek housing mortgage from State Bank of India, Gruh and HDFC. “Gruh is the only finance company which gives loans to [our] buyers with no income proof. This is very helpful for us,” Bakeri adds.

It hasn’t been an easy journey for Gruh, though. When the organization first approached rural home-buyers, it had to work hard at changing the mindset of this debt-averse group, grapple with unclear land titles and wean people away from the local moneylender. The organization’s staff also had to understand the intricacies of every self-employed customer’s livelihood and devise new models of identifying the borrowers’ income and repayment threshold. In the case of Futarmal for instance, Gruh appraised the family based on their everyday living habits, their bills for staples like sugar and oil bought for the eatery, the consistency of daily sales, the existence of an active bank account, the ability to provide a guarantor for the mortgage and their savings. Another plus for the Futarmals was that the loan was attached to all three male members of the family.

At present, financing homes in rural areas with a population of around 50,000 accounts for 48% of Gruh’s business. The rest comes from financing homes in urban towns. Gruh’s current asset portfolio is US$887 million, with loan disbursements doubling in the past five years from US$119 million in 2008 to US$280 million in the fiscal year ending March 2012. During the same period, operating profit rose from US$1.18 million to US$30 million, while the cost-to income ratio is down from 22% to 20%.

“Gruh’s loan asset quality has improved substantially,” says Gruh chairman Keki Mistry. Adds Choksey, “We’ve taken good credit risk and our recovery efficiency is better.” The company’s gross non-performing assets are down to 0.52% compared to 5% in the late 1990s. This is due to a host of reasons. For instance, demand for housing is on the rise, and property prices in both rural and urban India have gone up. In turn, this has impacted the ticket size of Gruh’s mortgages and has brought in new categories of customers. “Our customer may not necessarily be low-end. He could be a shopkeeper who is able to provide income proof,” Mistry notes.

With two-thirds of India’s 1.2 billion population residing in the hinterland, this is a huge market for mortgage players. Industry experts say that India’s mortgage loan-to-GDP ratio, which is in the range of 8% to 9%, is low compared to other Asian countries like China (20%), Hong Kong (43%) and Singapore (54%). According to a 2010 Monitor inclusive markets report, the market for rural mortgages in India in the US$5,660 to US$18,867 band comprises more than 20 million households and is a US$188 billion market. Another report from the Boston Consulting Group and the Federation of Indian Chambers of Commerce & Industry estimates that the total home mortgage market in India would increase from around US$110 billion in March 2011 to a whopping US$800 billion by 2020.

Gearing Up for Growth

Gruh is gearing up to take control of a bigger slice of this growing market. It has expanded its business to semi-urban and urban destinations outside Gujarat and is now present in several other states including Maharashtra, Rajasthan, Chhattisgarh, Karnataka and Tamil Nadu. “We want to penetrate deeper and it is easy to get into adjoining states,” says Choksey. He refers to the expansion as a “military operation, which combs the ground”. In Mumbai, for instance, the company reaches out to people on the outskirts. This strategy is two-pronged: Not only is it easy to access customers away from the city center, the price of real estate here is also less expensive, thus connecting the organization with new builders. “As the builders grow, so do we,” notes Suresh Iyer, head of operations at Gruh.

This expansion has further increased the diversity of Gruh’s customers. From only farmers earlier, the organization’s borrowers now include factory workers, small businessmen, roadside cobblers and tea vendors. These consumers have a lot in common: Many of them earlier relied on local moneylenders and ubiquitous non-banking finance companies (NBFCs) for their funding needs and are families from lower and middle-income households. Many of the customers are self-employed, earn in cash and have irregular incomes. This makes it tough for financiers to gauge their credit-worthiness.

Accessing funds, too, hasn’t been easy for Gruh. To address this issue, Gruh hit the bourse in 1992. As a result, the focus shifted to return on investment. In a bid to scale up operations, Gruh diversified into consumer finance. It also started providing construction funds to some real estate developers. The moves proved costly. The real estate crash in the mid-1990s very nearly sounded the death knell for Gruh with an outstanding of US$849 million.

At this time, Choksey, who was then a general manager at Gruh, was appointed managing director with the mandate to clean up the portfolio. He changed the delivery mechanism, stopped lending to developers and went about recovering some bad loans. “We created mortgage in lieu of receivables,” says Choksey. Gruh acquired land from builders who had defaulted, leveled it and sold it in lots. In some cases, the company even acquired flats and disposed them off. Under Choksey, Gruh was soon back on track.

New Challenges Ahead

But now there are pressures of a different kind. To boost the economy, one of the sectors that the government is focusing on is low-income housing. In the 2012-2013 Budget, the government has given permission to public and private enterprises for external commercial borrowings for low-cost affordable housing projects in order to expand the sector. In August, the National Housing Bank (NHB), the nodal agency for housing finance in India, slashed the interest rate by 1% on refinance to banks and HFCs on loans up to US$9,434 to boost affordable finance for low income homes in urban areas. On October 31, the NHB launched the Credit Risk Guarantee Fund Scheme to trigger the credit markets with loans up to US$9,300 for providing housing to the economically weaker section of people. “This is like insurance for housing finance companies,” notes Gruh’s Iyer. All these measures are likely to see banks and housing finance companies lend more to the informal sector.

With access to funds becoming easier and demand for housing increasing, corporate players are also making a beeline for the housing sector. Monitor’s Karamchandani says there are 40 developers in the low-income housing segment. Firms like Tata Housing and Value and Budget Housing Corporation (VHBC) set up by Bangalore-based Jerry Rao have launched homes in the US$13,207 to US$ 9,432 price bracket. Mahindra Rural Housing Finance, which is part of the auto-to-IT conglomerate the Mahindra Group, is providing housing mortgages to its automobile customers. Down south, the Muragappa Group’s asset management arm — Cholamandalam Investment — has recently announced plans to enter the segment.

The increased activity in the housing finance arena means both opportunities and increased competition for Gruh. “The market is large, housing demand is universal and the asset is immovable, providing big opportunities to players,” according to Rajesh Chakrabarti, assistant professor of finance at the Indian School of Business. Educationist and management consultant Prafull Anubhai Shah, a director at Gruh, says that the company is well entrenched in small and medium towns. “Over the years, [we] have established a great network and have experienced staff with an enviable record of providing customer-friendly service. [So] we do not anticipate any adverse impact due to competition,” he notes. But Gruh, he adds, will have to “innovate new products, maintain the same level of service with far-flung offices and larger staff and build well-knit management teams”.

Others like Amitabh Kundu, professor at the school of social sciences at the New Delhi-based Jawaharlal Nehru University, are not so gung-ho. “Many households with low levels of earning would default due to lack of affordability and fluctuations in income,” he cautions. Vikram Jain, who leads the low-income housing practice at Monitor Inclusive Markets doesn’t agree. According to Jain, these customers are not risky. “Having put down a large down payment on a home, the customers are keen to pay the installments on time,” he says. Jain adds a caveat though: Housing finance companies face developer risk, as they would be stuck with a large portfolio of mortgages where projects are delayed or even stalled. Even as Gruh lends only to home buyers and not developers, increasing competition will put pressure on margins — Gruh’s average spread is 2.5% to 3%.

But Choksey is confident and believes that Gruh has a head-start with its understanding of the income patterns and the needs of rural consumers. Adds Shah: “In the service industry, business transparency, trust and empathy play a key role. This is Gruh’s distinct competitive advantage.”

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