Most people take the easy way of waiting for the government to fix a problem. Some don’t:
It has almost taken Mahindra Rural Housing Finance (MRHF) 14 years to reach the million homes milestone. The company was formed in 2007-08 and has steadily been extending finance for housing to the underserved rural segments. And it is prepared for a long journey.
THE JOURNEY BEGINS
Initially when the team started the business, the thinking was that there will be some similarities in the customer profile to whom Mahindra Finance lends to. The assumption was that an existing Mahindra Finance customer would also be willing to take a housing loan. Rajnish Agarwal, CEO & MD interjects: “But it did not turn out like this. We found a different customer group outside of Mahindra Finance customer segment. There was a very large set of prospects who were having ‘kucha’ houses, or they wanted to add one room into their house and or want to build a roof for their house or convert a mud house into a brick-and-mortar house. So those were the needs of the customers, but they were not a tractor or a vehicle customer…they were rural customers looking for smaller ticket size loans.”
Normally formal credit was not available to such customers, and the only practical choice they had was to borrow from a money lender. Even a money lender would not lend long term capital to these customers because their incomes were unstable and uncertain. For many of them, the property documents may not be in the name of the current borrower, but rather that of their ancestors and relatives. In many cases, the customer income was uneven and subject to extrinsic conditions like weather and mandi prices.
Rajnish Agarwal shares the journey: “We started this business to serve underserved and under-represented customers, of whom we found a very large number. We started from Tamil Nadu, then moved to Maharashtra and then kept on adding 1-2 states every year, the latest one being Odisha. Today we are working in 14 states across the country. We are also adding new products. We are present in 88,000+ villages through 750+ physical branches right now. India however has over 6 lakh villages, and there is a long way to go.”
Mahindra Home Finance usually struggles to find the first one or two customers whilst starting operations in a new village. As the news spreads by word of mouth, getting new customers becomes easier. “There are villages, where we have 200+ customers. So that’s how the business gets built. We increase the penetration inside the village, we form a relationship with the people and then we go to the neighbouring villages, it is an expansion of trust and partnership, not just capital,” says Rajnish Agarwal
Fortunately for MRHFL, there are not too many players who want to do this business with a loan size of Rs50,000-150,000. Challenges include small ticket size, physical nature of cash collection, customers not paying on due date, and some more.
MRHFL faces challenges when they have a large customer base in a region and when vagaries of nature disrupt these customers’ income and their ability to repay. MRHFL experienced a huge disruption during demonetization and another one during covid however, the business managed to pick up pace over time.
Fortunately, their customers are able repay off the loan even after delays which is what covers the risk of this business and the cost of collection. So, the company tries making the EMI affordable by extending the loan tenure. If the borrower goes to a moneylender, he will pay a much higher rate of interest. Even microfinance companies lend Rs20,000-30,000 for 6-9 months, so the amount and period, both are insufficient. So that is the niche for MRHFL.
In spite of the EMI being small, there are many months when the customer doesn’t earn enough or even if he earns, there are some challenges in the family, such as a medical expenses or rains or drought spoil the crops or the money which he has to get from the ‘mandi’ is not received in time, or if he is a daily wage worker, he’s not getting work every month. How does the company handle this?
Rajnish Agarwal explains: “We have built a two-pronged approach – (i) a proprietary credit scoring model to assess agri and casual incomes (ii) flexible repayment date matching income cycles. We also have zero tolerance for wilful defaulters as they hamper our survival and service to other customers. This management would help us further the business, be answerable to stakeholders and raise funds to grow. On the whole, the business is very profitable and it meets a very important need of society; it is a socially impactful business.”
Since this is a volume business with volatility, MRHFL has slightly changed its strategy now. It has added one more product – the affordable business – which caters to the semi-urban and more affluent class of customers. These typically are salaried customers who have a regular source of income, who are less likely to default. The margins are low in that segment, and volume is very large. “By parallelly growing our affordable and rural housing business, we are looking towards a sustainable growth for the business in the near future.”
Currently more than two thirds of the business comprise of rural housing since the company started lending to rural customers. Gradually MRHFL plans to grow the affordable housing business over time. Another segment that MRHFL is trying to address is the premium and documented customer in the rural segment – typically rich farmers with land holding, tractors and utility vehicles. They will not pay high rates of interest, but the default rates also will be low, the ticket sizes will be higher and they will further de-risk the rural business in the same geography.
MRHFL has to ensure that the loan amount is being used for the purpose it is given. So, the funds are disbursed in 2-3 stages, as per the progress of the work.
THE NEXT MILLION
Team MRHFL has now understood this business very well and has put a robust credit process in place. They have introduced many new methods because now the credit bureaus are very active in those geographies because of microfinance loans been given regularly. Now 70-80% of the customers have a credit imprint. The amounts may be smaller than what they seek for housing finance, but yes, the borrowing and repayment data is becoming available to assist in further lending.
Rajnish Agarwal expects to reach the next million customers in 5 to 6 years. He has observed a tipping point – if in one village there is already 15-20 customers, every month the company gets 2-4 customers through referrals from existing customers. Then of course, the company is adding more branches and getting into more states.
MRHFL started with the help of Mahindra Finance branches so as to minimize costs initially when the business was not available. Now that the company has a solid base of customers, when it is prudent and a minimum size is achieved, a physically separate branch is set up. Earlier 80-90% of the branches were common with Mahindra Finance, but now almost 75% are independent. The company currently has 600+ independent own branches and another 125 are still common.
In a typical year, the company aims to increase their branch size by 10% in a year. A typical branch has 12-15 employees because the branch encompasses both business and support function teams . One interesting mechanism that MRHFL has deployed is that when a loan is given, for the first 12 months, the collection is done by the salesperson, and only after that is the work passed on to the collections team. This ensures that the salesperson has his skin in the loan.
Collections started largely with cash and gradually shifted to digital, thanks to UPI. MRHFL also tied up with India Post Payments Bank about 3 years ago as for many customers, the post office was closer than the branch. Further, the lender has tied up with Common Service Centers (CSC) which are spreading wide.
Further, the company has made available all kinds of digital capabilities. “As a part of our mission for transforming lives, it has been our endeavour to drive cashless payments within our collections processes. The pandemic provided a huge opportunity for us to leverage digital tools such as UPI, Net Banking, Bharat Bill Payment System to maximize digital payments,” states Rajnish Agarwal.
MRHF has a loan protection scheme where we ensure that the customer’s loan is protected in the unlikely event of his death. The borrower could be the only earning member in the family and the lender does not want that the liability of the loan should shift to his family. Typically this insurance adds a mere Rs20-30 to the EMI. MRHF has tied up with Kotak Life and HDFC Life for life insurance. As a housing finance company, we also extend fire insurance covers to our customers for any accidental mishaps.
Funding comes mainly from banks, mutual funds and pension funds. Within banks, the lender gets more funds from private sector banks as compared to public sector banks. Even National Housing Bank (NHB) funds housing finance companies at a very nominal rate.
MRHFL is a subsidiary of Mahindra Finance. At some point of time even the regulator, National Housing Bank (NHB) was an equity participant for 10 years. Usually, NHB invests for around three–five years to initially assist the business. However, due to MRHFL’s unique business model that focused on driving social impact and generating good returns, NHB extended its investment for a period of 10 years.