cash usage and turnaround times, develop new products, provide better services to customers and use analytics for
portfolio monitoring and credit appraisal. In the third quarter of Fiscal 2020, approximately 48 NBFC-MFIs have reported
90% of their disbursement through cashless mode. To improve efficiency, many MFIs have provided tablets to their loan
officers, thereby eliminating branch visits by loan officers for routine procedural activities. Digitalization is also helping
microfinance institutions monitor disbursed loans as each borrower’s data is available in digital form and can be accessed
easily. Paperwork has reduced with the use of tablets and entries on disbursements and repayments are made in real time.

Direct updating of information on the core platform has also enabled better servicing of customers over their credit life
cycles. It also helps in targeted marketing, cross-selling of products, and product customization. E-KYC and biometric
scanners do away with the requirement for physical documents and help lower turnaround time. The lower cost of serving
customers, better productivity and lower credit costs through the use of technology are expected to help MFIs improve
profitability.

Affordable housing loan (Ticket size < = 2.5 million)

Affordable Housing Loan is expected to increase at a CAGR of approximately 8% to 9% till Fiscal 2023

 

Despite the enormous unmet demand in the affordable housing finance market, the segment recorded growth at a CAGR
of 9% from Fiscal 2017 to 2020. At the end of Fiscal 2020, outstanding loans amounted to 9.1 trillion growing at 8%
from @ 8.6 trillion at the end of Fiscal 2019. The momentum in the affordable housing loans slowed down in the fourth
quarter of Fiscal 2020 amid the turbulence due to the pandemic.

The economic slowdown due to pandemic-led lockdown and consequent social distancing measures are likely to impact
the demand for home loans. Demand for under-construction projects is likely to be hit the most due to labour migration
during the lockdown and uncertainty of project execution. Limited income and unemployment of the target customers
could impact property purchase decisions in Fiscal 2021. Affordable housing segment is expected to grow at a CAGR of
8% to 9% till the end of Fiscal 2023.

Key factors contributing to competition of SFBs in affordable housing finance

* Focus on and understanding of the target market: Given the target borrower’s profile, companies will need to have a
clear and deeper understanding of micro markets and develop a strong local network. A strong network helps players
source business from niche customer categories through references from existing customers. It is observed that
successful players in the segment generally focus on a few geographies where they have a good understanding and
scale up gradually to manage costs and asset quality better.

* Access to public deposits for SFBs gives it a pricing advantage due to lower cost of funds compared with HFCs.

* Collection efficiency: Given that players in the segment typically cater to the lower income customer segment, many
of whom may not be financially literate, a strong focus and understanding of SFBs on collections and monitoring
risk of default at the customer level will help them keep asset quality under check.

Low mortgage penetration and increasing lender interest to lead growth

 

While the mortgage-to-GDP ratio in India is very low at 12.4% as of March 31, 2019, mortgage penetration in affordable
housing is even smaller. Due to the burgeoning traditional mortgage finance market, a few commercial banks have entered
the affordable housing market. These banks tend to offer long-term mortgage loans, which extend to 20 years and require
down payment between 10% and 30% of the home value, pay slips, and legal title to property. Even at such levels,
affordable housing loan penetration in India is expected to remain lower than in developed markets, such as, the United
States and developing countries, such as, China.

Impact of liquidity crisis on HFCs

With tightened liquidity post the IL&FS situation in September 2018, HFCs have encountered structural challenges in
the form of increased refinancing risk and asset-liability mismatch, which slowed down housing loan disbursements.
HFCs access to funds from the debt capital markets has also declined considerably, especially for those companies with
high negative ALM mismatches. These HFCs are dependent on banks for funding, which has led to a rise in the cost of
funds. SFBs, on the other hand, have access to deposits, resulting in lower cost of funds, which allows them to compete
with HFCs on pricing in underpenetrated regions and take away some share from HFCs, resulting in the growth of overall
business for SFBs.

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