Practical financing challenges of informal sector & financing challenges of informal settlements

Practical Challenges of the Informal Sector &

Financing Challenges of Informal Settlements

Mathew Joseph

AUHF - 2007 AGM & Conference Program, Ghana - September 2007

Mathew JosephSenior General Manager

Housing Development Finance Corporation Limited - Indiaconfidential

�Urban Area’s

� Housing Shortage - 16 Million Units

� 80% of which are EWS/ LIG requirements

Indian ScenarioHousing Requirements are 45 Million Units

(including 7 million back log)

� 80% of which are EWS/ LIG requirements

�Rural Area’s

� Housing Shortage - 22 Million Units

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Practical Challenges of the Informal Sector

Practical Challenges of the Informal Sectorthe Informal Sectorthe Informal Sector

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� Issues on Local Government Support

� Lack of strong local Government to manage

Urban Planning.

� Lack of Fiscal strength and Enforcement

Practical Challenges

� Lack of Fiscal strength and Enforcement

Credibility of local Governments.

� Lack of Fiscal Incentives for the Private

Players.

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� Lack of appropriate Government policy.

�Stamp Duties - currently same for EWS/ LIG/ HIG.

�Non-availability of land at affordable/ reasonable


�Non-availability of land at affordable/ reasonable

cost to EWS/ LIG.

�Disaster Resistant Housing to withstand floods,

earth quake’s, etc…

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�Relocation and Rehabilitation Issues.

�Ownership in Urban Slums/ Low Income

settlementsis often illegal or quasilegal.


settlementsis often illegal or quasilegal.

�MFI’s targeting Women folks.confidential

�Financially & administratively weak village

Administration and its capacity to mobilise

resources to manage Projects.

�Government Agenciesnot playing the role of the


�Government Agenciesnot playing the role of the

Facilitator/ Enabler to the desired extent.

�Deficient Infrastructure especially drinking water,

health care and primary education.

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�Factors to be addressed in the Informal Sector

include

� Social

� Cultural

� Production Resources- Quality of Housing


� Production Resources- Quality of Housing

� Institutional

�Changes in Social System with the decreasing

reliance on self help - Mutual Sharing.

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�Dominance of Caste & other social systems.

�Migration of the educated & economically well

off.


�Exodus of Skilled labour to cities & Foreign

Countries.confidential

�Settlement plan not in place that optimises use

of land, supportive to incremental growth with

Infrastructure Services being provided.


�The lack of adequate support for the private

sector in areas of land development,

infrastructure, technology, improved design &

construction.

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� Limited Access to New Building Materials,

Construction Methods & Technology.

�Construction cost and quality requirements.


�Absence of Land Records/ Imperfect Title Documents.

� Issues of Repossession

� No Clear Land Titles� Legal Impediments

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Financing Challenges of

Financing Challenges of of

Informal Settlementsof

Informal Settlementsconfidential

�High Credit Risk perceived for the EWS/LIG/

Informal Sector due to historical factors.

Financing Challenges

�High Transaction & Servicing costs due to LowDensity & Access Issues in Rural Areas.

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�Higher Operating Cost on account of

� Low Average size of Loans

� Larger Number of Borrowers

� Vast Area of Operations


� Vast Area of Operations

� Inability to assess Credit Risks

� No Pay Slips.

� No Tax Returns.

� Uncertain Cash Flows.

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� Lower Profit Margin to the lender due to

� Smaller Transaction sizes.

� Fixed Costs of each Transaction.

�Financing Challenges in arranging long tenor


�Financing Challenges in arranging long tenor

loans for the lending agency.

�Non Buoyant Rural Economy as measured by the

decline in the share of Agriculture.

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�The absence of lending skills required by the

intermediary agencies like an NGO.

�Different schemes being offered by the NGO

leading to loss of focus.


�The Intermediaries interest wanes as the years go

by due to the long term nature of the loans.

�Schemes are operated with no margin money &

others as a grant.

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�Regular contact with the intermediary agency not

being maintained by the lending agencies.

�Problems in getting the Due Diligence of the

intermediary agency conducted.


� Lack of Banking Access inspite of having the

worlds largest network in the Banking Sector.

�Under developed Housing Credit System &

Institutions.

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� Indian MFI’s being vary of building up a large

Housing Loan Portfolio.

�Targets not being set by larger Banks in Lending

to SHG’s.


to SHG’s.

� Informal Credit being Expensive & Exploitative.

�Availability of grant funds side by side, results

in the beneficiary tending to default on the

commercial loan.

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� Irregular and/or seasonal Income during the

Loan Tenure (say 7 - 15 years).

� Lack of tangible proof for Income Assessment,


� Lack of tangible proof for Income Assessment,

Savings & Cash Flows.

� Lack of Collateral or Intangible Security

Arrangements which may not be enforceable.

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�Process for Verification of the Beneficiaries.

�Absence of Professional Collection Agency.

� Issueson Title of the Property.


� Issueson Title of the Property.

�Non-availability of Title Insurance & Mortgage

Insurance.

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�Registration of Mortgage not in place to prevent

Sale before loan is closed.

�Registration in joint names of the spouse normally

ensuresrepayment.


ensuresrepayment.

� Little being done for providing reasonable sized

loans for the LIG segment for their productive

requirements of funds.

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� Low Income & High Incidence of Poverty affecting

Capital Formation Savings Rate, Purchasing Power

& Disposable Surplus.

Financial Challenges

� Interest Subsidy as a Substitute for Tax Benefits.

�Non-availability of Title Insurance & Mortgage

Insurance.

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Way ForwardWay Forwardconfidential

�Ways to Expand Housing Finance to EWS/LIGs

� Relaxing Building Bye-laws

� Permitting Higher FSI

� Revampingof Land Title Systems

Way Forward

� Revampingof Land Title Systems

� Creation of Zoning and Land Use that specifically

encourages low income Housing.

� Introducing concept of TDR’s.

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�Fiscal Incentives to the Building Materialmanufacturers to encourage Appropriate/Alternative Materials and Technologies.

�Encourage Creating a stock of Innovatively

Way Forward

Managed Rental Housing.

�Encouraging Social Housing Like Night Shelters forEWS/ LIG Segments.

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�Encouraging Township type of Development in theoutskirts.

�Developing the Secondary Mortgage Market.

�Developing Suitable Refinance Schemesto Boost

Way Forward

�Developing Suitable Refinance Schemesto Boostthe Supply of EWS/ LIG Housing.

�Modificaiton of Laws like Land Ceiling, RentControls - Encouraging Public/ PrivatePartnership.

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�Capacity Building Program on Low Cost Housing

for Architects, Engineers, Builders, Etc…

�Promoting Mixed Use of Land for cross

Way Forward

�Promoting Mixed Use of Land for cross

subsidization of EWS.

�Designing houses which are adequate shelter and an

efficient work place at an economic cost.

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Challenge is to provide speedy affordable credit to

Low Income Individuals without much

Way Forward

paperwork, without collateral's, at the

borrowers door step in cash.confidential

Thank You!Thank You!Thank You!Thank You!confidential