Two years back Amit Magia, who was arranging funds for corporate India, saw a huge opportunity emerging in the affordable housing space. Magia observed that customers mainly employed in the unorganised sector, weren't able to get finance, due to lack of documents and finance providers, too, weren't able to gauge the proper credit worthiness of borrower.
Seeing this as an opportunity especially creating social impact, Magia in January 2016 started Khush Housing Finance (KHFL), named after its child to cater to the needs of the affordable housing segment in the middle-and-low income groups, who otherwise has no access to housing finances due to lack of a formal income stream. KFHL largely operates under the Pradhan Mantri Awas Yogna (PMAY) in the cities and towns designated by regulator NHB.
Speaking to Business Today's Mahesh Nayak, Magia, CEO and Managing Director of KHFL talks about the affordable housing space, competition, industry scenario and how he plans to grow his business which also includes dilution of stakes to investors.
How has been the growth of Khush Housing Finance in the last one year? What new has the company done to grow its business in the pure housing finance business?
We started our lending operations in January 2016. In the last one-and-a-half year we have disbursed close to Rs 120 crore (of which Rs 60-70 crore is debt funding which was borrowed from banks and NBFC at an interest rate of 11 per cent), with an average loan size of closer Rs 10 lakh. We currently have close to 1,200 plus customers. We currently operate out of 13 branches - 8 in Maharashtra (Thane, Virar, Pune, Kolhapur, Aurangabad, Ahmednagar, Nashik and Borivali), two in Gujarat (Surat & Ahmedabad) and two in Rajasthan (Jaipur & Ajmer).
Close to 52 per cent of our portfolio is covered under the Credit Linked Subsidy Scheme (CLSS) under the Pradhan Mantri Awaas Yojna (PMAY). This means that these eligible customers receive interest subsidy under the PMAY of approximately Rs. 2.20 lakhs per customer. Effectively, this would mean that the EMI payable by these customers covered under CLSS will be much less with their loan outstanding coming down by the subsidy amount. Our Loan-to-Value (LTV) improves significantly thereby improving further the quality of our asset. Our novel methodology not only mitigates the risks but identifies and rates the borrower's credit worthiness despite technical bottlenecks like lack of documentation and income proof
Which are the new geography that the company has entered and why? Why has the company not diversified other than Maharashtra and Gujarat and why?
We plan to set up 30 offices across the country in the next three years. For the current fiscal, we are also looking to expand our presence in the other states by opening new offices in the coming months. We are looking to expand our business in Rajasthan and set up additional 2-3 more branches in Gujarat and Maharashtra in the current year. We are looking to scale up this business in a big way and are targeting a Rs 5 crore business per branch/per month.
We definitely don't want to be largest or the biggest player, but we want to be meaningful player wherever we have are present. In the next three years. we want be among the top three players in affordable segment. We would be like to be known as HDFC of affordable housing finance. This year we are targeting to build up a portfolio of about Rs 250 crore.
How much do these two states account for the overall small housing finance market? What type of growth do you envisage for the company and the sector?
Gujarat and Maharashtra account for more than one-third of the housing mortgage market of the entire country. In the next five year, we hope to see an 100 per cent growth on year-on-year (y-o-y) basis and sector should grow at 15-20 per cent y-o-y.
There has been lot of competition in the small housing finance company space. How do you differentiate yourself from others? Why should people come to you when others are giving loan cheap? (Please mention number of players, the total pie and potential pie in the space)
When you cross Rs 50 crore in capital and Rs 100 crore in book size, we think than only market looks at you as serious player. We are in the process of creating a distinct edge in the market where, so far, about 80 plus housing finance companies who have got the approval of National Housing Board. But only about 25 are functional. We has set a target to reach about Rs 1,000 crore of disbursement in the next three years. Though it looks ambitious, the target is achievable, considering the kind of demand and supply gap that exists at present. With almost 50 plus per cent of its portfolio falling under the Pradhan Mantri Awas Yojana scheme, we are looking at having a pan-India footprint in the next few years. What I see is by this year-end we will have book of Rs300 crore plus and that is meaningful.
How much capital have you infused in the company? Till when do you see the company playing on pure equity capital? How do you plan to bring down your cost of borrowing?
We have infused additional Rs 25 crore in company's equity capital thereby taking company's equity capital to Rs 50 crore. These additional funds will be available to the company from the promoters till such time that the sanctioned borrowings are drawn down. Further Rs 50 crore to be infused in coming time. We have already received bank and NBFC funding of Rs 60 crore at a rate of 11 per cent, while got an funding line of Rs 150 crore at sub 11 per cent due to the fall in interest rates for our disbursement. With an equity capital of Rs 50 crore we can raised debt upto 4 to 6 times (Rs 200 to 300 crore) of our equity capital.
What is the average ticket size as well as average lending rate for Khush? (Please do mention the high and low rate of lending done by the company)
Our average loan tick size is close to Rs 10 lakhs . Effective rate goes as low as 8 per cent for few customers and can go higher as upwards of 20 per cent.
What has been the reason for Khush to get into other vertical and leaving the pure housing finance category?
We are very much into pure housing category that too in affordable segment. Loan against property is very small portion
How much does housing finance account for to the overall business and how do you see the pie in the next two years?
Close to 80 per cent our business from lending towards housing finance and gradually plan to increase to around 90 per cent. Loan towards property will be a very small portion of our business.
We have seen defaults emerging in the space. How are you managing the default scenario? How much time are you willing to give the defaulter before acquiring the assets?
Default is part and parcel of this business but what is the level of default is important. To identify cause is important and improve on that is important . It's too early for us to see any account at actual NPA stage as of now . Statutorily we have to give 90 days for classifying any account as NPA . In this business understanding the cause is important willingness to pay is established than there is no harm in extending / restructuring and if along with willingness to pay if ability to pay is also not there than one should take appropriate action immediately . While we do not have any NPAs on our book, however 2 per cent of our total book is under stress.
With the slowdown in the economy there are rising concerns that small housing finance company will face lot of pressure and once the default rate increases due to the loss in jobs it would bring lot of pressure in the sector. What is your view and why?
We bet on employability , our customers are drivers, vegetable vendors, nurses, maid etc. and we don't see any threat to their jobs in fact their income is rising also typically its family income of spouse and sometimes parents and/or siblings so risk of job loss also divided in this segment. Economic slowdown will not hit segment of much as job availability of avenues is plenty at these levels.
Why have you gone into the loan against property segment? Are you competitive in this space and how different are you our competitor? What is the average loan size in the category? Where have you seen the borrower using the money borrowed from you under loan against property?
See there are SBIs and HDFCs all over but business of IndiaBulls and DHFLs also thriving what I mean to say is each company has its value proposition and business is there for each one of them. Home extension , Repair renovations , Occasional borrowings like for marriages or children's education etc also need to be address and when it is backed by hard asset it is secured lending.
Who are the investors in the company? Do you plan to dilute stakes in the company?
Khush Housing Finance is completely owned by our family as of now. We want to create value first and moment when our growth is constrained by the equity we will dilute. In the last few months, couple of private equity investors and multilateral agencies has shown keen interest but as a strategy we want to fully leveraged our equity base before restoring to external sources. We are currently in talks with couple of public sector banks and private sector banks to raise additional funds requirements for our next phase of growth.
In the interim period, a few large NBFCs have also evinced interest in funding us and we would be able to close these transactions very shortly. We plan to raise around Rs 300 crore for this year (next year: Rs 500 crore) through a mix of debt (bank loans, debenture, etc) and equity for the current year, where its cost of finance is about 11 per cent; while disbursement is being made at about 13 per cent. In the next three-four years, we are also evaluating the possibility of going in for an IPO, which will not only help the company in meeting its expanded capital requirement, but also help reduce the cost of funds, as this will provide it access to a large pool of institutional assistance
How has the revenue grown for the company in the last year?
We have just break even in last year typically this business takes 3 years for break even .
The vision of 2022 housing for all is no way in the horizon, but what is the goal set by the company by 2022?
As far as housing is concerned, this government in its election manifesto had emphasised its vision of Housing for All by 2022. We have always maintained that the key role of the government is to create the enabling environment for housing. We think the present government has delivered on this. To my mind, the Union Budget 2017-18 will go down in history as the "affordable housing budget". Incentives have been given to all constituents - developers, home-loan borrowers and lenders. One knows of the multiplier effects that housing has on the economy. I cannot think of any other key sector that has a 100% deduction on profits and gains for a period of five years. This makes me quite confident that supply will scale up rapidly.
The borrower has benefitted from lower interest rates and continued fiscal benefits on home loans. The widening of the government's Credit Linked Subsidy Scheme (CLSS) to include the middle-income group is another game changer. The burden for a borrower is always making the down-payment and paying the initial equated monthly instalments (EMI). This is where the upfront subsidy given to the borrower helps. Another very sensible measure is allowing the withdrawal of up to 90% of the employees' provident fund to buy a house and service the EMI. For the lenders, the granting of infrastructure status for affordable housing means access to lower-cost, long-tenor funding from external commercial borrowings, insurance companies and pension and provident funds. Masala bonds have opened up a new source of funding from overseas investors and the advantage is that the currency risk is not borne by the company.