Micro Housing Finance Corporation (MHFC) has been operational for over a decade. The vision of the company is to service low-income groups who have home-owner aspirations and whose professions or income levels are largely ignored by the mainstream companies. Effectively, it has initiated low-cost housing finance before it became a buzzword. Madhu Menon, Co-Founder and Director, discusses the current position and nuanced nature of their business in a chat with Pankaj Joshi.
How do you translate your vision into a viable business model?
Our business has been focussed on financially excluded people. From the real estate industry perspective, MHFC has a strong presence in practically any budget project where sales activity is visible. In value terms, a property transaction size of Rs 10 lakh, or below, is our preferred deal. Within that, our average loan size is around Rs 4.5 lakh, and the EMI would be in the Rs 4,500- 4,700 range.
If you look at the home mortgage business, there are only three factors—costs, credit quality and structure of capital—which are in the company’s control. For the rest, you just respond to external stimuli. We are quite well-performing in that regard. The mortgage industry works on a net interest margin (NIM) spread anywhere between 300-550 basis points of the book size. We have a book size currently in the range of Rs 500 crore, and the FY2017 net margin was Rs 16.50 crore.
In terms of other costs, we are much below industry cost standards due to our small-ticket business model. On a book of Rs 500 crore, we have a pre-tax income of Rs 8 crore. Going forward, we believe that ratios are likely to see some improvement because in areas like technology, a good amount of investment is already in place to service a bigger activity level.
We are probably the best in cost-to-income ratio when you factor in our much lower ticket size and multiplicity of transactions for the same book size. In terms of transaction viability, we believe any family anywhere can save Rs 2,000 or more on rent once they get into their own home so the incremental amount payable as EMI makes eminent sense. We just stick to the norm that income should be 3x of the EMI for us to look at the transaction.
If you talk of costs, the industry generally looks at a 1.5-1.7 per cent processing fee to manage operating costs so that the entire NIM goes to the operating profit level, but with our ticket size this is very difficult. At a book size of Rs 2,000 crore, and a processing fee income of Rs 30 crore, we would probably achieve such an operating structure. However, that is distant for us. For FY2020, we are looking at a book size of above Rs 1,500 crore, an NIM of Rs 50 crore and a profit before tax of Rs 35 crore.
How much does technology matter among low-income and low-literacy clients in funding business?
Much more than one could imagine— for starters, operations are totally paperless. Other than physical property documents, there is hardly any paper generated anywhere in the process. Disbursements are through the banking system and so are the repayments. Our tech investment has been around Rs 2.5 crore in a five-year period, which has mainly been for creating and maintaining an end-to-end solution. We have no branches outside of Mumbai but still, we have just got a footprint into our seventh state. Without offices we have our own people to do the physical check process. Devices, Google co-ordinates, and a daily checklist of things to do— these are our monitoring mechanisms.
Our manpower is around 50 and within that we have 12-14 people in the credit function. We have 8-10 people in the project evaluation segment; around 10-12 in systems; and a similar number in the accounts and finance compliance team. Our HR-admin team consists of 3-4 people. In our business, site visits are more critical than the average housing finance business, just because of two reasons. First, the customer is generally too occupied with basic income generation and second we also feel that a visit gives us a good feel of customer profile, their business activity and (by extension) their solvency and loan eligibility.
Can you quantify the effect that MHFC has had on its client universe?
We have already indicated that time is money for most of our customers. We ensure that our customers run around a lot less than what the MHFC management team would have to, in their individual capacities.
Secondly, the very fact that a housing loan is in the offing has induced a lot of clients to get into the banking system. Here, let us be clear that the Jan Dhan Yojana has helped us tremendously, in the sense that it has catalysed account opening. Today, nearly 100 per cent of our prospective customers have bank accounts. However, we believe that 50-60 per cent have started using the account regularly because of their association with MHFC. When you break down our Rs 500 crore book across the average loan size, you get an active client universe of 13,000-14,000. Till date, we have an aggregate database of around 19,000 customers.
At the supply side, the government has been the trigger for supply of affordable housing—be it Gujarat, Rajasthan, Madhya Pradesh or Chhattisgarh. Other than Maharashtra, the average affordable property cost is Rs 7-8 lakh. For an area like Mumbai, we just have to look at the metropolitan area outskirts. Overall, there is a good pipeline of affordable housing coming up, which helps our project teams set targets. Metros in that context are irrelevant to us. Then there is the CLSS (Credit Linked Subsidy Scheme) which is a great support. You must appreciate that our client universe just saves and saves for years to create a home and we just catalyse the process, aided by the CLSS. To that end, we also encourage prepayment without levy of charges.
Prepayments happen when more people of the family join the workforce. When we do a loan, we also look at all income earners responsible for repayment. So we also look at composition of the family—whether family income can go up through children getting employment. Another aspect is that we encourage family involvement into the process. Wherever a woman’s income is part of our evaluation and acceptance criteria, we insist on the woman being joint owner of the property, which again places the transaction favourably on the CLSS criteria. That is a socio-economic change we are aiding.
Lastly, when we do a loan transaction, we make sure that all income earners have their life insured, up to the total loan amount. In the case of a sad event, the loan is compensated and the asset remains with the family.
How do you look at your capital structure in the context of all this?
Today we have a leverage factor of 4x—our Rs 500 crore book is built on an equity size of Rs 100 crore. We have, among our shareholders, the Michael and Susan Dell Foundation, the India Financial Inclusion Fund and Unilazer Alternative Ventures. Private equity has around 53 per cent share, with promoter holding at 20 per cent and employee holding at a similar 20 per cent, the rest distributed among the promoter circle. From the growth perspective, we may need to raise equity in the second half of FY2019, not before. By then we may have got to 6x leverage and so equity would be imperative. Given the pedigree of investors, we do not see any problems in the same.