Financial inclusion of low income households in urban areas is a key component
WASHINGTON, May 14, 2013 - The World Bank today approved a $100 million credit aimed at helping low income households in Indian cities access loans to purchase, build or upgrade their dwellings.
The Low Income Housing Finance Project will be implemented by the National Housing Bank (NHB). It will support financial inclusion by providing access to housing finance to low-income and informal sector households in urban areas and by strengthening the capacity of financial institutions that target these groups on a market basis.
India’s urban population is expanding at a rapid pace and is expected to rise to 600 million by 2031, more than double that in 2001. Housing shortages in India are also acute: the 2012 urban housing backlog was estimated at 19 million, indicating that one fourth of the urban dwellers are living in inadequate housing or are homeless.
“Some 10 million people flock to India’s towns and cities each year and need homes to live in. But a majority of these are low-income, informal sector workers who find themselves shut out of formal financial markets when they go seeking loans to build or buy themselves houses. They are forced to use unregulated, informal sources of finance at much higher rates of interest,” said Onno Ruhl, World Bank Country Director for India. “This project will allow low-income households to switch from expensive informal finance to longer-term, formal sources for their housing needs. This we expect will contribute to an average increase in incomes of people at the bottom of the pyramid.”
Housing shortages are a result of several challenges facing the housing sector. Land use policies and building norms restrict the availability of housing. Developers tend to refrain from entering the low-income market due to perceived risks associated with buyers who lack access to formal finance. The bulk of the low-income population work in the informal sector, with no documentation of income, and need customized lending guidelines. Most banks in India do not have the tools or the capacity to assess and manage credit risk for this market. And most non-bank financial institutions lack access to the long-term funding necessary to make housing finance affordable.
The Low Income Housing Finance Project will support the financial institutions which target low-income and informal sector households and build their capacity to scale up sustainable housing finance.
“Through learning and innovative financing, the project will build capacity in NHB and the primary lenders which target low-income borrowers. New products, risk management, distribution and market infrastructure will address the informality of income and property rights,” said Michael Markels, Lead Financial Specialist, World Bank and the Project’s Team Leader. “Initially, the project will introduce pilots to test the sustainability of these lending guidelines and products. One of the aims is to preserve affordability by finding alternative forms of collateral to reduce credit risk and keep interest rates at manageable levels. Over-indebtedness and loan quality will be monitored regularly,” he added.
The project will target to help households with income not exceeding Rs 200,000 per annum (or Rs 16,667 monthly income equivalent). The loan size will initially be capped at Rs 5 lakhs, or just under $10,000.
The project will be financed by a credit from the International Development Association (IDA) – the World Bank’s concessionary lending arm – which provides interest-free loans with 25 years to maturity and a grace period of five years.