As the Government of India strives to achieve its vision Viksit Bharat By 2047, the affordable housing finance segment will play a key role in promoting inclusive economic growth. As metros and other urban areas face increasing infrastructural stress, now is the time to shift the focus on affordable housing beyond India's urban centers.
Overview of the affordable housing landscape
Urbanization is forecast to reach 40% by 2030[1]Affordable housing becomes essential for sustainable and inclusive growth, thereby contributing to the goal of a developed India. It will be crucial to regulate the housing demand of rural migrants seeking better livelihoods in Tier 2 and Tier 3 cities, thereby narrowing the gap between urban and rural India. In addition, it can drive long-term economic growth through increased employment through construction and infrastructure development activities, accelerate financial inclusion and promote social upliftment.
India currently has a shortage of 10.1 million housing units, highlighting the need for affordable housing systems. By 2030, 95.2% of demand will come from affordable housing, representing 21.1 million units. Meanwhile, EWS (economically weaker population) households will drive 45.8% of the demand for affordable housing, highlighting the region's critical need.[2] The central government with its initiatives like this Pradhan Mantri Awas Yojana (PMAY) and SWAMIH (Special Window for Affordable and Mid-Income Housing) are committed to advancing the broader home ownership enablement agenda for 'Bharat'.
Growth potential
The potential funding opportunity for lenders in the affordable housing segment is estimated at ₹45 trillion[3]. Low-income housing is very attractive to housing finance companies (HFCs) as it is typically owner-occupied property and has a lower risk of default. Additionally, 77% of customers in the affordable housing cohort rely on loans to purchase or build homes – an indication that there is still plenty of room for real estate finance companies to expand.
Undoubtedly, the affordable housing segment is poised for growth, supported by major initiatives from both the central and state governments, particularly for rural housing schemes. Additionally, reforms such as transfer of regulatory oversight from the National Housing Bank to the RBI and integration of Priority Sector Lending (PSL) norms with PMAY have helped streamline regulations and improve access to finance.
These support measures have led to increased demand for affordable housing loans, including for self-built properties. This trend has increased as the younger population prefers to move away from crowded metros and Tier 1 cities given the relatively low-cost options in Tier 2 cities and beyond.
The recent cuts in the GST rate on cement, steel and other construction materials from 28% to 18% will boost the housing and construction sector – and provide a major boost to the middle-income and affordable housing segments, especially in Tier 2 cities. This will also reduce the financial burden on both buyers and developers. In addition, optimizing cash flows can limit the risk of price increases. This landmark reform is expected to significantly reduce input costs, thereby improving project feasibility and accelerating infrastructure development across India. This represents a good growth opportunity for the financing of self-built apartments and the entire affordable housing segment.
Strategic measures to promote market penetration
However, given the dynamic market environment, developing non-metro markets requires a number of strategic measures. For example, tailored financial products for different income brackets are required to effectively meet the different needs of rural and semi-urban loan applicants. HFCs must also leverage innovative distribution networks while leveraging alternative data for credit scoring, implementing AI-powered analytics and strengthening risk management protocols.
In addition, a technology-led approach should be adopted in providing flexible financing solutions to ensure sustainable growth, financial inclusiveness and an improved early warning system to monitor potential defaults in advance. Technology has proven to be a powerful enabler across the entire real estate financing value chain, from lending to customer onboarding to underwriting, disbursement and collection. HFCs are increasingly using digital tools, including artificial intelligence (AI) and machine learning (ML), to improve credit scoring and improve customer engagement. Government-led initiatives such as the Account Aggregator framework have further simplified documentation and made the entire process more seamless, secure and efficient.
It is important to emphasize that intelligent distribution channels supported by an efficient organizational structure are important for the success of HFCs. To work this out, dedicated internal teams could work in unison with a robust network of DSAs (direct sales agents) to attract a wider range of customers and develop new business. These efforts will be important to understand market needs as well as cultural and geographical characteristics and then respond to them with tailored products and offerings.
The prospects for affordable housing
Even as lenders compete to expand market share in the changing real estate financing market, this opportunity bodes well for customers as they gain access to innovative financing solutions that meet their needs. For lenders to thrive in this environment, a sustainable growth strategy as well as a diversified distribution network and a dynamic risk management framework are critical. Meanwhile, favorable government initiatives such as the Interest Subsidy Scheme (ISS) will maintain demand momentum.
Robust regulatory support, growing demand from emerging middle class groups, enabling policy reforms and supportive tax measures are all geared towards driving sustainable growth in the affordable housing segment. Ultimately, these measures will also help support the center's dream of “housing for all” as soon as possible, as will the “Viksit Bharat' Mission until 2047.
The article was written by Valli Sekar, Chief Business Officer, PNB Housing Finance.