Housing finance company, Muthoot Homefin, set up in 2014, is predominantly active in the affordable housing space. The firm sees its business model aligned with a larger socio-economic goal, and hence intends to focus on affordable housing, with greater reliance on technology for its growth. S Ramratthinam, CEO of Muthoot Homefin, talks about the market and the company’s plans in a chat with Pankaj Joshi.
Edited excerpts:
How is the sector positioned and where do you position Muthoot Homefin?
Affordable housing is the fastest growing segment within the overall housing loan space. If we define affordable housing as loans less than or equal to 25 lakh then they contribute around 48 per cent of the overall home loan outstanding. If you look at a longer-term perspective for affordable housing, both demand and supply have been showing growth. The Pradhan Mantri Awas Yojana (PMAY) has a target of 20 million units (homes) to be allotted by 2022, and in just that there is a shortage of 19 million units in urban areas and 15 million in rural areas, as per Niti Aayog estimates
There are different government schemes with different subsidy elements for each. Our focus is on two category of housing projects – the economically weaker section (EWS) scheme and the low income group (LIG) scheme. In both cases our lending median amounts are in the middle of the category. For instance in the LIG, we typically look at Rs 25-30 lakh transactions and occasionally go to 50 lakh. One merit in this lending is that we comply with the RBI guidelines for priority lending, which then influences both our ability to access funds from lending institutions like banks, and also to get better rates.
Our rates are by necessity higher than banks, which means we have to target a different universe of home buyers. We have to assess formal and informal income earners in the applicant family, some with no ITR record or salary slips. Those people do not have access to the formal financial system and therefore are willing to be our customers, which also means that we are widening the scope of people into the overall financial system and forward fulfilment of the overall vision of the government.
What is your overall presence on the ground?
We are operational in the extended suburbs of all Tier-I cities. However, our main focus is on Tier-III and Tier-IV cities. We operate in a hub and spoke model covering a distance of 50 kms radius from hub location. Today, we have 80 branches in 72 cities across 12 states. Within this, 30 are standalone branches and 50 are set-ups within establishments of the parent, Muthoot Finance. Within the states, our main contributors are Maharashtra (27 per cent), Gujarat (23 per cent), Rajasthan (12 per cent) and Madhya Pradesh (8 per cent). You will see that generally companies engaged in lending to the affordable housing segment target these states. There is a confluence of factors for targeting such states— like informal income holders, good growth prospects and reasonable control on delinquency, especially when compared to other markets like Delhi-NCR, Punjab-Haryana and Uttar Pradesh. Our plan of action is to identify location and assess potential, then most probably we would have the support of a branch of the parent, which has 4,500 branches nationwide. Then we follow the hub and spoke model, create a mass in that territory and then branch out on our own.
Policy-wise, we focus on builder and project scrutiny. We study the project from different angles – technical, location, legal, environmental. Even in legal, for a project we would have one team and when an individual borrower comes for an individual unit in the project we would have a different team. Today we have more than 400 builders whose project schemes fit in our criteria and we would not want to go beyond 20-25 per cent exposure in any single project. With that stipulation, we also do not take interest till the project completion would be at 75-80 per cent stage.
How do you define your performance this year and forward?
If you look from a shorter-term perspective, this year was a bit difficult and many companies are seeing de-growth in their business. However, we are estimating a revenue of Rs 42-44 crore for the current year, similar to last year. With an average ticket size of Rs 9.90 lakh across all categories, we look at a disbursement of around Rs 75 crore per month, Within this, our cost-to-revenue ratio is below 20 per cent, among the best in the industry and that reflects the advantage of our parentage and support. In fact, this year we have had our Crisil rating upgraded to AA. Disbursements last year were around Rs 1,000 crore and if we match it this time it will be good. The group philosophy is conservative and profit-focussed. We have a gross NPA ratio of 0.7 per cent against industry average of 2 per cent which keeps rising.
Manpower-wise we are roughly 1,050, with 450 in the feet-on-street category, 270 in the back-office scrutiny and 330 in branch and corporate functions. We have a good team in place and now have to improve manpower productivity, which means greater technology investment. We have invested around Rs 4-5 crore in technology across our three years of operations, and in the next three years we will invest a similar amount. We have an IT company in the group, which is again a great advantage.
Looking at growth drivers, we have become one of the six registered finance providers for Maharashtra state projects. To give perspective, Maharashtra targets for 2022 are 20.5 lakh units in the EWS and LIG segments. In Gujarat, we have similar structural arrangements in clusters like Surat and Ahmedabad. Madhya Pradesh is a state where similar agreements are being discussed. Another growth driver is our parent. Muthoot Finance today has 50 crore customers across its life history. With all filters in place, we would be able to get a crore potential clients from that. Today the cross-sell percentage from the parent is 2 per cent, which we would aim to get to 5 per cent in six months and stabilise at 10 per cent.
We have a 1 per cent market share today which we aim to get to 5 per cent over the next five years. Our active customer base today is 22,000 which we aim to get to 1 lakh over next five years. That would represent an AUM of Rs 12,000 crore and a revenue of around Rs 1,200 crore with a 30 per cent net profit margin. Today we have no product in builder loans, or in the loan against property category, which in themselves are huge high-margin segments. Over a five year period, there will be further diversification. In terms of capital requirement, the group is making sure we are self-sufficient for the next three-five years and right now the mindset is not towards external participation. We would not want to fund anything except first-time home buyers, which mean that we do not swell our disbursements with second-home proposals or plot loans as of now.
On the regulations side, what would you look at for growth?
Firstly, the last Budget talked of an affordable housing fund which is yet to take off. Today housing finance has 94 companies operational, but then the economics of affordable housing (the ticket size, the target population and so on) necessitate that such businesses must be looked at in a different way. The national objectives of financial inclusion, priority sector lending and raising the socio-economic profile of the borrower are being met through this activity. Today, the need is to make this sector broad-based beyond the handful of lenders who make up around 75 per cent of the sector.
