‘Seeing People for Who They Are, Not What They Can Prove on Paper’
Shubham focused on home loans to India’s huge informal workforce
Headquartered in Gurgaon, India, Shubham Housing Development Finance Co. was created in 2010 by two experienced lending professionals, Sanjay Chaturvedi and Ajay Oak, who saw a massive gap in the availability of formal credit to low-income households. Having obtained registration from the National Housing Bank – India’s regulator for housing finance institutions – in February 2011, Shubham has steadily expanded its reach, starting with branches in the National Capital Region to having a presence in 12 states. Its primary products are mortgages and home-improvement loans.
With a wave of rapid urbanization over the past few decades, India is poised to become the most populous nation in the world in the coming decades. This has led to a crisis: Of the current 350 million people who live in urban areas, almost 60 percent live in slums or low-quality houses because they can’t afford better houses and they have poor access to credit. Shubham (where the author serves on the management team) provides credit to those with informal incomes to build a safer and better home.
“We were amongst the first organisations focused on helping urban lower-income families own a home by helping with financing,” said CEO Chaturvedi. “The intention is that irrespective of the source of income, we should be able to provide loans to individuals for making a better home for themselves.”
Most mortgage companies place people with no formal income proof on “negative lists” and consider them to be a huge risk. At Shubham we see them as a vast working-class population who define India but are surprisingly excluded from access to formal credit.
Shubham has devised a process to underwrite loans based on a household’s real income following an intensive budget analysis method. The company knows that the key to servicing these clients lies in the simplicity of delivery. Therefore, our lending model relies on neighbourhood branches within relevant service areas – with more coming soon – and unique budget analysis allowing recognition of real income and affordability of households.
Shubham offers home loans for three purposes: purchase of a house or apartment for residential use; purchase of a plot of land and construction of a home on it; and improvement or expansion of an existing home. Loan amounts are between $1,500 and $30,000; the average home loan is $8,500. Approximately 65 percent of Shubham’s customers seek loans to purchase ready-made homes. Loan amounts are based on applicants’ repayment capacity, age, educational qualifications, stability and continuity of income, number of dependents, co-applicant’s income, assets, liabilities and saving habits, among other factors. The maximum loan tenure is 15 years, but is limited by the loan closing when the applicant reaches age 65.
(Mr. Yogesh, a client of Shubham Housing Development Finance Co., at his fruit stand in Faridibad, India, left.)
Salaried borrowers are typically low pay grade employees such as drivers, blue collar workers, household help, etc., who by and large receive their salary in cash. Self-employed borrowers are generally small merchants, commodity traders, garage owners, mechanics, general store owners, etc.
Shubham understands that customers work very hard to earn and then save to pay for their monthly installments. To ensure that they do not enter a vicious debt trap due to unforeseen exigencies, Shubham undertakes a thorough assessment by speaking to clients and those in their immediate environment. This helps fill the information gap that exists in the absence of any credit history and also ensures the customer has adequate buffers, as the installments for the loan need to be paid over the long term. In this way, Shubham evaluates people for who they are, not for what they can prove on paper.
“This takes time, but at the end of it we are able to provide financial inclusion to some people from India’s huge informal workforce, thus making them ready for other credit programs,” said Oak, the COO.
Every organization has its own set of challenges, depending on the stage of growth it is in. Since Shubham was one of the early players in the informal home loan segment, a few notable trials it encountered and others that it foresees in the near future are as follows:
• Uncharted waters – In the past, if someone who did not have any income documentation wanted a loan, they had very few options. These options included turning to friends and family or borrowing from money lenders who charged very high interest rates and followed unscrupulous collection practices.
Companies such as Shubham made concerted efforts to overcome this segment’s negative connotation by instituting professional practices and standardization across the board.
• Financial ecosystem – A key challenge is the lack of a financial ecosystem amongst various players. No financial services firm can operate on its own. Each is dependent on another for services or information. An example is something as simple as having a bank account or a centralised system to capture any credit history of the client. A bank account is imperative to ensure financial inclusion and a centralised system allows firms to know if the customer has taken any loan, of any size.
Shubham has helped customers by providing them with financial knowledge that goes above and beyond their home loan details. The company helps them open bank accounts and also buy insurance for themselves and their loved ones.
• Supply of capital – The backbone of financial inclusion is access to financial services when needed and at an affordable rate. There are limited initiatives by large banking organisations to provide funding to the lower-income segment, leaving a large gap to be filled by smaller financial companies. To do this, these smaller companies need access to cheap credit so that they can pass on the benefit to the public.
Shubham links its interest rates to its borrowing costs, passing on any benefit it receives. The company strives to reduce its borrowing costs to ensure customers aren’t completely burdened with mortgage payments and that they build an asset while growing personally and professionally.
• Limited use of technology – With close to 790 million mobile users in India, mobile technology can provide financial access to remote locations and also impart financial literacy. However, only 46 percent of the lower-income segment/rural market has a mobile phone, and an even a lower percentage has smartphones.
Shubham intends to leverage technology to provide ease of access to its customers. This will enable the company to sanction loans faster and also provide the ability for customers to have their loan details at their fingertips.
Technology can play a key role in enhancing inclusion, but only if it is pervasive.
It has been more than four years since Shubham started and it has helped more than 11,000 families own a home. With increased interest in this sector, we believe the company is poised to grow rapidly and is optimistic it can be the mortgage lender of choice for families with informal income.
Top photo: Tej Pal Singh, a client of Shubham Housing Development Finance Co.
Vidyut Perti is part of the core management team at Shubham Housing Development Finance Co. and heads its strategic initiatives.