Ramesh is bringing valuable, affordable and high quality houses to the most disadvantaged rural areas through an inclusive process of empowering rural communities and an innovative microfinance system adjusted to building houses. In addition, he is improving their life conditions through creating awareness around the importance of proper hygiene and sanitation. To keep the program affordable and low cost he is partnering with local NGOs.
The New Idea
Ramesh is building fostering an ecosystem that finances high quality homes for disenfranchised rural families while keeping the costs of the financing system low. He is doing this by rethinking the entire housing financing system to best serve rural populations. The long-term nature of mortgages is a large impediment to access for rural households as they are typically only able to predict their income in the short term. Ramesh is initiating a subsequent way of construction. This would be through a series of shorter term loans that would finance different modules of the house. The shorter term loans would enable different parts of the house to be built over a suitable period of time.
To access the credit history of rural householders he has adjusted the Grameen bank group based microfinance system to the housing system. He lends to rural householders who are part of existing self-help groups (SHGs) with a strong history of repayment consisting of least two or three cycles of repayment. He is empowering existing self-help groups in partnership with NGOs to improve their living conditions through training in sanitation and hygiene, thereby strengthening the capacity of SHGs for the long term.
To issue these loans Ramesh is working to get the buy-in of regulators to accept an alternate means to assess collateral and credit history of rural population. This is by creating a paralegal mortgage backed up by the self-help group members the recipient is part of, and approved by the village Panchayat (local government). To identify suitable recipients and scale his work, he partners with micro-finance institutions. They must go through an extensive vetting process and must already have a deep and on-going relationship with a community.
Ramesh is opening up a new marketplace for housing microfinance and building investor confidence by proving the financial viability of his model, so that other public and private finance institutions also build housing microfinance services for this area.
The Indian microfinance sector has been rapidly expanding over the past few decades, and according to a recent India Ratings and Research report, is expected to grow at 24% annually over the next four years. NGOs, Non-Banking Financial Companies (NBFCs), and commercial banks are financing the creation of tens of new Microfinance Institutions (MFIs) and their innovative financial products. These products, primarily catered to low income families, include everything from micro enterprise loans to education loans, from insurance products to investment advisory services.
Yet, there are few instances of successful housing finance products. A 2013 report Housing Microfinance in India: Benchmarking the Status by ACCESS-ASSIST found that in India, the total housing shortage is 42.69 million units in rural areas. The same report reported that out of the total number of people in India without adequate housing, over 90% of them live below the poverty line. This growing need is slowly being brought to attention; global surveys conducted on low-income households in developing countries indicate that priority for housing is higher than education and health. Sustainable and inclusive housing solutions, indeed, could bolster large economic growth quickly and efficiently.
Many rural households are largely primitive in nature and are not built to withhold extreme weather conditions, particularly heavy rainfall. As many are constructed with mud and other non-durable materials, many families constantly have to repair their home which takes a large strain on finances. Furthermore, the sanitation conditions are very low in these rural communities where there is no sewage and families live within extremely small confines.
Currently, the housing reform efforts in rural India are primarily initiatives led by the central and state governments. While many of these have exhibited initial success, few have been able to effectively scale due to funding issues and lack of partnerships with commercial banks and other large lenders. Furthermore, under these government initiatives, many of the newly financed homes are more of a liability than an asset for the rural homeowners. First, these homes are frequently built in locations specified by the government, rather than the homeowner. As a result, many of the houses built are not being used for their intended purpose, and instead as storage rooms if not unoccupied. Government funded homes can never become assets to the homeowners as they can’t use the home as collateral for future loans. The government thus needs the help of private sector lenders, local NGOs/MFIs, and village panchayats, but very few of these organizations have entered the sector.
Housing loans are typically larger and longer lasting, with an average maturity period of 10 years. This long payback period makes the loan unattractive to a rural householder or slum dweller, who typically has an unpredictable income and is thus averse to falling into a debt trap. Rural income is largely agricultural based, therefore seasonal and success is weather dependent. Furthermore, low income rural homeowners do not have a title or any other type of documentation to show ownership of land that is sufficient for mainstream banks. This is a major obstacle as many families may not have had documentation for generations and the process of obtaining and putting it in place may take years and seems like an impossible mission to accomplish without a nimble financing system. The initial work towards establishing documentation is the most difficult.
Therefore, mortgages are a risk for both the homeowners and any financial institution providing the loans. Due to the cash-based economy in most parts of rural areas, there is no proper documentation of income for these rural homeowners, increasing the risk for MFIs and institutional lenders. Lastly, there is the issue of high transaction costs associated with loans from banking institutions. By removing these systemic barriers to housing finance, private sector funding in collaboration with local partners can provide access to loans for millions of Indians who currently live without a home. However, no one has found a way to unravel these obstacles.
Ramesh having worked for the banking sector for many years, came to recognize that many programs established in the sector targeting disenfranchised rural areas were stuck and not operating due to these obstacles previously mentioned. Ramesh decided to leave banking in 2007 to launch his own ideas for solving the problem of housing finance for rural households.
In 2009, he registered with Swarna Pragati Housing Finance and after discussions with many players he came up with a new model rethinking housing finance based on empowering rural communities.
To bring his new housing model to fruition., Ramesh is building partnerships with a range of key stakeholders including microfinance institutions (MFI), regulators, Panchayats (rural local governance), and investors.
To overcome the high cost of operating and providing financing to rural areas, a major deterrent for large banks, Ramesh built the idea of partnering with local MFIs, many of whom are non-profit organizations, to build on their expertise on rural financing and long term engagements with communities. In this way, he is ensuring a sustainable and durable financial strategy.
To help source the right partners, Ramesh leverages a Business Associate Selection tool, built in-house, which helps to identify the desirability of the potential partner. The tool gathers feedback on a number of factors, including the number of years the MFI has been operating in the communities, the reputation the MFI has built, organizational structure, historical portfolios and feedback from formal institutions they have partnered with so far. SP assesses their ethical standards and their numerical capacity for clients. Once partners are selected, SP develops a partnership agreement and revenue sharing model which consists of between 3-4% commission for the MFI. SP takes 3-4% of the interest, plus a 1% processing fee for the sustainability of their operations. The partners then begin assessing the needs of rural communities they work with and surface candidates who they think would qualify for housing finance. SP and the local MFI partner work in close conjunction with one another. In many instances, SP’s field staff is based out of the office of the local MFI partner.
As for households, they must demonstrate at least two sources of income per family from different sectors. The household must demonstrate they have thought through plans for housing developments. For example, this may be evidence of construction on some aspect of the house, or materials already bought such as bricks. Finally, the candidate should have a bank account or at least be willing to open one up to receive loan payments from SP.
Once candidates pass the due diligence process and begin construction on their home, the loan is transferred directly from SP to the recipient to prevent zero leakage of funds. SP receives the funds directly from investors. The partner micro finance institution works to manage loan repayment in association with SP. The housing construction of the house is monitored via photos taken at different points of construction. Costs of labour and materials must also be disclosed to SP and the local MFI partner.
To assess credit history in rural communities can be challenging as many households do not have a bank account or documentation to support their income. To overcome this, Ramesh is looking at a candidate’s participation and repayment history within a self-help group as an extension of their credit history leveraging the Grameen bank model for housing finance. One of the biggest obstacles to credit is that many rural householders may not possess the proper documentation needed to substantiate ownership over land and/or property. Ramesh is looking at new ways to establish ownership by is empowering the village government – the local Pachayat to establish ownership through the creation of a paralegal mortgage. A paralegal mortgage is built from sanctity of the local Panchayat Act. SP creates a document asserting an individual’s ownership over a property and the Panchayat verifies and approves this based on their prior knowledge of the individual’s life history. The Pachayat issues a lien order on the house until the loan is paid back in full to SP.
To prove the reliability of the group, Ramesh established a standard that candidates must demonstrate a strong credit history, proven by participation in a self-help group with robust history of repayment (at least two to three repayment cycles complete). To strengthen the capacity of the self-help group in the long-term SP and MFI work together to building the financial literacy of the group which is integral part of their participation. Members of the self-help group become co-responsible for the loan issued to one to two of its members at a time.
Finally, SP is looking at a house as a set of modules (ex. walls, roofing as module, toilet, workspace) that can be financed as one module at a time rather than a long-term mortgage. As rural families typically can only predict their incomes in the short term, a modular loan with shorter payback period is a better fit for their income pattern than a long-term mortgage. There are roughly three types of loans available. Sanitation Loan used primarily for the construction of a toilet would be upwards of 25 000 INR for up to 18 months. The second type is housing loans up to 200 000 INR with payback period of 3 to 4 years and finally housing loans up to 500 000 INR over 5-7 years. The average income in many of the communities is roughly 15 000 INR to 25 000 INR. Repayment is in monthly installments with an interest rate between 21-23%. Repayment is collected by MFI field staff at the homes of recipients.
Starting in 2009 working with a 100 groups in the Maharashtra in some of the toughest agriculture situations, SP has now spread to three other states has financed over 9000 clients spread across 2300 villages over the past 4 years. Most of the loans were fully repaid except for some that were severely affected by the natural disasters in their areas. SP has built partnerships with 24 microfinance institutions across these four states. Currently SP employs 180 staff, most of whom are on the field.
In order to tackle the enormity of the issues of improving living conditions in rural communities, Ramesh strongly believes that more private and public players working in the space are needed. By demonstrating the success of his model and continuing to scale it, Ramesh is galvanizing other players to move into housing microfinance space.
Ramesh intends to open up the housing micro-finance space to mainstream finance institutions, including government banks, by proving the viability of the model. SP is expanding to Madhya Pradesh and Gujarat. By early 2016, Ramesh is aiming to build 18 000 houses and by 2020, Ramesh envisions scaling to 10 states across India.
Ramesh was brought up across the country as his father worked with the central government in civil aviation and they often relocated. Ramesh’s father was a highly influential force in his life and someone he regarded as his strongest role model growing up. One of the qualities he most admired from his father was his ability to connect and move with people from all walks of life – something that was instilled in him as important.
When Ramesh was nine, he lost his mother and to provide a stable upbringing his father put him in boarding school where he thrived. Ramesh was an all-rounder and leader in school and became the school captain for his excellence in academics, sports and collegiality He was also part of the Scout movement and was one of a few select students across the country to receive the President’s Scout Award. Ramesh went on to university to study Physics at the University of Delhi on full scholarship – only given to one student per discipline.
During the time of his graduation from university India was experiencing a new wave of change politically and economically. In particular, as part of the post – nationalization of banks within India, government was mandating banks to incorporate developmental finance within their activities. There was a push for banks to expand financial services to rural markets to improve livelihoods. It was this new shift within the banking sector that drew Ramesh towards it. He wanted to contribute by leveraging financing for economic development of rural communities.
Following graduation he joined the State Bank of India’s (SBI) new graduation program that sought top talent to train and nurture into future leaders of the bank. He became part of the first cohort of hires to be trained under a new mandate for the bank to expand its activities into rural markets. This is when his in-depth exposure began around building linkages between mainstream finance and rural needs. He had spent most of his life prior to this as a city dweller so this was an incredibly eye-opening experience and laid the foundation for his understanding about leveraging finance as a developmental tool. His career within SBI grew as he worked with personal banking, corporate banking, treasury operations and towards heading SBI operations for Western India where he was responsible for one third of the bank’s business.
In 2004, during his tenure as the head of SBI’s Western India Division, the National Bank for Agriculture and Rural Development (NABARD) was putting a large effort to build linkages between self-help groups across the country (SHGs) and mainstream banks to enable more access to livelihood financing. Unfortunately, this was not working in Maharashtra and Ramesh so he took it upon himself to explore what was going wrong. As microfinance was not as lucrative for the large banks, most CEOs had neglected it as an area to prioritize. Ramesh felt this was important and in 2004 arranged for a stakeholder meeting inviting staff from rural branches and NGOs to understand why the linkages were not getting built. This meeting revealed a primary issue from the bank’s side that only rural branch managers had the responsibility of trying to expand microfinance services. However, this was in addition to many other responsibilities and as a result this did not take priority. The branch manager had no other support to be able to push this forward. To resolve this issue he started a company sensitization program for employees to engage them in seeing the relevance and importance of microfinance to the work of SBI. To help move this forward, Ramesh created opportunities and responsibilities for employees to be a Mithra SHG (friend of SHG) to help create more bridges between the bank and rural clients. Ramesh’s aim was to help mainstream microfinance and to that extent over 3 years SBI held 85% of microfinance activities across all banks in Maharashtra and Goa. For the efforts he lead he was awarded for ‘Excellence in Micro Credit’ from the Government of Maharashtra in 2005 and from the National Bank for Agriculture and Rural Development (NABARD) in 2004, 2005 and 2006.
In 2005, NABARD invited him to be chairman on the National Committee of Habitat who’s focus was to address the deficiencies in the rural housing finance. He contributed to the development of a report that contributed to the development on the National Rural Habitat Policy for India.
After seeing how many good ideas, including many recommendations from the National Rural Habitat Policy for India, did not come into play, it made Ramesh think about his own approach. In 2009, Ramesh started Swarna Pragati to address the market gap he was consistently seeing around access to housing finance in rural communities. He is now a shaper of the entire ecosystem for rural housing finance.