It is like a mission for Mahindra Rural Housing Finance to create dwellings for the rural folk. Anuj Mehra, MD, explains the importance of customer trust that is the hallmark of the company
Mohan: Mahindra Rural Housing Finance operates in a unique segment – rural India. Can you outline the advantages as well as disadvantages that you face? How has the company been able to overcome the disadvantages, especially through product design and customer education?
Anuj Mehra,
Managing Director, Mahindra Rural Housing Finance Limited
Anuj Mehra: Rather than advantages or disadvantages, I would like to describe opportunities and challenges of operating in rural India.Rural housing finance is a very big opportunity. A KPMG report had mentioned that by 2022 the rural housing shortage would be 63-65 million units. Converted into a housing finance opportunity, this is a sizeable opportunity!
More importantly, the Mahindra Group has been operating in the rural markets and Mahindra Finance has been financing tractors and vehicles in rural India for the last 25 years. Thus, as a group we understand rural India, the rural customer and their needs and aspirations.
The large opportunity coupled with our strength (presence in and understanding of the rural markets), made rural housing finance a good strategic option.
Our challenges fall into 4 broad categories:
- Customer acquisition related
- Evaluation related
- Product design
- Customer Service
Customer Acquisition: There are no channel partners (like builders or DSAs) who can help identify customers for an HFC. Further, mass media also plays a limited role in this product category. As a result, the entire customer acquisition process has to be handled in-house. Typically, we begin the sourcing process by holding a meeting of villagers at a central location in the village. There, our team members explain our loan products, the requirements and the process. Customers evincing interest are then met separately and the process taken forward.
Evaluation: Each loan has to be evaluated from the perspectives of credit-worthiness, legal (title to property) and technical appropriateness.
Customers in rural India have limited banking habits and no credit history. Thus, credit evaluation is difficult. Over the last few years we have created a rich data base of crops grown in each area that we operate in, the likely input costs to grow that crop and the yield per acre of the crop. Using market price data, we can therefore estimate what a customer’s income is likely to be. In addition, for various profiles we have estimates of likely wages. As a further refinement, we have created our own credit scoring models using machine learning and our data base of customers and their behavior over a period of time.
Legal due diligence poses serious challenges as most land records are outdated. Thus, our team helps the customers mutate land records to reflect the current ownership.
Again, our team of technically qualified people help the customer estimate the likely cost of construction, identify the property and supervise the stages of construction linked to which the loan is released in stages.
Since getting third party vendors for all these activities was difficult and ineffective, we handle all these activities in-house.
Most importantly, our entire team of approximately 9000 people currently, has been hired locally. The team understands the local conditions, milieu etc very well. This is critical for a proper evaluation.
Product Design Issues: Because of the type of customers we serve, we had to reconfigure the basic product! For eg, unlike a typical monthly EMI, we allow for quarterly and half-yearly EMIs, linked to crop-cycles to facilitate for easy repayments. Even before it was made mandatory by the regulator, we were encouraging customers to foreclose/ pre-pay their repayment amounts. We realized that our customers had erratic and bulky or bunched up inflows. Thus, as part of our theme of customer centricity, we decided to accept advance payments whenever he had extra cash flows to make such additional payments.
Customer Servicing: Servicing our customer base is the biggest challenge. To give some statistics, for a book size of approximately Rs 6500 crore, we have more than 700,000 customers across 70,000 villages being served by 9000 team members! Most of our customers make cash repayments of small amounts. Thus, the team has to meet the same customer repeatedly to collect the EMIs. Even today, despite the ever-increasing penetration of the net, customers prefer to meet and discuss issues personally with our team members. This necessitates a large team to cater to the customers.
Your focus has been more on finance for home improvement and home modification. How could the company make an impact?
It is important to understand the process of home construction in rural areas. People follow a piece-meal approach. When money from a harvest comes in, a certain portion of the house is built, the next season enables the next step of home construction, and so on. There have been customers who have built a house over six years. This is where we decided to change the practice. We told them ‘Instead of building your dream home over time, complete it in one go and repay us over the years’. This is why we speak about our loans as being ‘home completion’ loans. In 9 out of 10 cases, people in rural areas take loans for incremental construction of their homes; there is very little buying or selling that happens.
Also, with regard to modification, we believe that there exists a lot of need, especially in rural areas, to undertake small repairs (roof, walls, etc). In addition, sanitation is an important need that is now being taken seriously across the nation. These are areas where our loans make a difference. We undertake annual impact assessment studies with BCTA (A UN affiliated organization) to understand the impact we, as a business, create on communities. Our study last year reaffirmed the fact that our customers visit the doctor less often than the village average and believe in the need for improved sanitation. It is vital, as a business serving rural India, to ‘do well by doing good’ and our home improvement loans are a step in this direction.
How could you make the processes of loan application and sanction simple for the rural people? Can you explain the processes?
In rural areas, simplicity is key. The loan process is a huge deterrent for many prospective customers looking towards a financial institution to obtain a loan. This is where we decided to focus on ‘service’. We focused on 3 broad areas to facilitate this:
- Pre-lead service: Our employees are constantly travelling across villages conducting ‘loan melas’ and ‘gram sabhas’ where they speak about the entire process of a home loan, in an ‘easy-to-understand’ manner. Also, because these employees belong to villages in the vicinity and because over time, they start building relationships with people around, their trustworthiness rises. This allows for easy communication between them and the local populace, thus making them understand the loan process in an efficient manner. We also make sure that we emphasize on the importance of ‘minimal but quality documentation’ and this reflects across our marketing collateral too.
- Simple communication: Through our campaigns, we try and connect with our prospective customers in modes that they are comfortable with. Comics that explain the simplicity of our loan process, wall paintings that speak about the ease with which a loan can be obtained, flyers that give a detailed list of documents required and our ‘on-ground’ team members who are available frequently to answer any doubts that might arise.
- Post-lead service: We have a call center working 6 days a week and fluent in all languages (which our customers speak) that caters to any query a customer/prospective customer might face. This helps in times when our ‘on-ground executive’ is not available for immediate query resolution. The call center is also fluent with different aspects of the loan process.
At every stage of the loan sanctioning process, our employee keeps the customer informed of the status of his/her application. This communication – simple, transparent and frequent – is what enables us to communicate the loan process in an easy manner to our customers.
It is a fact that villagers often go for informal methods of finance, like a money lender, so that documentation is minimal. You have devised a mechanism to cater to such customers. Can you give details?
There are two major barriers that do not let a villager approach a financial institution for a loan:
- The fear of being rejected
- The inconvenience with regard to excessive documentation
Owing to these barriers, villagers end up spending a significant portion of their income paying huge interests to local moneylenders. A few of our processes are devised in a way to tackle this problem:
Hand-holding with respect to documentation: We not just help our customers by informing them about the documents required for a loan but, in many cases, we aid in creation of many of these documents. We help them open bank accounts, formalize property and land documents. This not just aids them in getting a loan, but it also monetizes their property by rendering it ‘saleable’ in the future. This reduces, to a great extent, the barrier with regards to excessive documentation.
Building trust with communities: With our on-ground employees, our simple communication and a relationship built with villagers, we make sure that we project an ‘accessible’ image to our customers. Once we begin disbursing loans in a particular village, word spreads soon and this makes villagers more trusting of us.
A combination, thus, of trust and hand-holding becomes vital towards enabling villagers to believe in financial institutions.
Can you outline the efforts made by the company in creating awareness about financial discipline and in converting the land or property the rural people own into an asset and then monetize on this asset?
Right from the moment of loan application, our customer-executive hand-holds the customer in multiple processes: opening bank accounts, helping him/her mutate land records/ obtain updated land records, thereby making the house an asset. We thus help the rural customers monetize their existing asset (home) by using it as a collateral to borrow more, increasing their creditworthiness. As part of this process, we accompany them to government offices, panchayat offices and all of this contributes towards a relationship that we build, over time, with them.
Furthermore, we also conduct financial literacy drives on an annual basis where we create awareness with regards to multiple financial products. We try to inculcate financial discipline by using means like NACH for new loan accounts and enabling tools like UPI to encourage digital repayments. A combination of all these processes results in our customer developing a financial awareness that only improves with time.
What is the average ticket size of the loans you sanction? How could you avoid NPAs?
In 9 out of 10 cases, people in rural areas take loans for incremental construction of their home; there is very little buying or selling that happens. So, the average ticket size of such loans is about Rs 1 lakh and the LTV (loan to value) ratio is much smaller at about 25-30%. We finance up to 75% of the amount required for construction and encourage the customer to also invest a small portion by himself/herself to involve a ‘personal stake’ in the process. This ensures that the funds are utilized for the right purposes. In addition, we, in most cases, fund the amount over multiple payment tranches which are aligned to different stages of construction. After every tranche, our field team visits for an inspection to assess the % completion of the home. Once we receive a green signal from our field team, the next tranche is then deposited in the customer’s account. This is a vital first step for us in lowering the overall risk associated with an account.
We also use our proprietary tools like the Credit Score (a statistical, predictive model which uses machine learning and empirical data to predict the future repayment behavior of a prospective customer) and the Credit Book (a knowledge repository built over time that has information on customer incomes across categories) to enable high-quality decision making before loan sanctioning. This is also an important step in the initial phase towards reducing the overall risk.
Post the loan disbursement, we work towards building a long relationship with the customer by offering him/her multiple modes of repayment: Digital modes, NACH, branch visits, home visits, etc to enable on-time repayments.
Also, owing to the high dependency on weather, there are years where agricultural income is impacted. At these times, we sit with the customer and try and work out solutions in order to avoid an NPA situation.
Thus, processes before, during and after a loan sanctioning process contribute towards controlling the overall NPAs.
What has been the year on year growth of your loan book in the rural home finance segment in the last 3 financial years?
Over the past 3 years, our book has grown at a CAGR of ~40%.
What are your plans for promoting affordable housing? Would this mean you will operate in urban areas? What would be the expected loan book in the next 4 years?
For us, the affordable housing sector currently accounts for 12% of our loan book. We expect loans for affordable housing to account for nearly half of our total loan book in the next 4 to 5 years. Affordable Housing has the potential to grow faster because it is on a relatively lower base and a bigger ticket size. According to official estimates, there is a shortage of around 60 million housing units – 20 million in urban areas and 40 million in rural areas. This demand, aided by the impetus provided by various government schemes, will definitely encourage more players to look at this space seriously.
Even currently, we have customers in urban areas. It is a not a geography play that we are in but a customer profile play. In the affordable housing space, we cater to customers in the EWS/LIG categories.
Customers in rural markets are primarily dependent on agriculture and their cash flows are bulky. Under affordable housing, we are looking at customers with a steady monthly income. Once this business stabilizes, it can help us mitigate risk and hence this would be a strong growth area for us in the near future.
What according to you are the constraints in the government’s aim of providing housing for all by 2022? What can be the measures that the government need to take in order to help entities like HFCs to be catalysts in this ambitious program?
According to official estimates, there is a shortage of around 60 million housing units – 20 million in urban areas and 40 million in rural areas. The biggest challenge in the case of affordable housing is the availability of land for building such units. While granting of infrastructure status to affordable housing will help developers raise funds at a reasonable cost, what is more important is to make land available for construction of such units.
Cost of construction is not dramatically different, but land cost makes all the difference. If the government can focus on providing reasonably priced land, then the supply side will be taken care of and we can make rapid strides. Since the government cannot increase the land mass, increasing land supply means two steps:
- increasing the FSI allowed to build. This however will imply investments in infrastructure to ensure basic needs are met and quality of life does not suffer. (for eg water supply to the area, electricity, roads to ensure connectivity etc).
- developing areas adjacent to major cities (suburbs) through an aggressive investment in infrastructure.
What are the major risks that you perceive in the affordable housing segment?
Like any other segment, there are two major categories of risks: customer-related and builder- related. Most of the customers in the affordable housing segment would tend to have erratic and bulky cash flows. This will pose collection challenges.
The builder related risks are larger. A significant portion of the housing units will be supplied by developers having limited experience and a limited financial track record. Assessing the project risk and mitigating against that will be a challenge.
How do you think enactments like RERA have helped the housing finance companies?
As mentioned earlier, there is a developer risk associated with affordable housing projects as an HFC may be dealing with developers it has not dealt with before. RERA minimizes these risks. It also reassures the customer that his house will be constructed and delivered on time. This is key for a customer because the house is perhaps the largest asset he owns!
