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In India, demand for residential properties and real estate has been soaring. While the Indian government has been consistently executing and working on schemes such as the Pradhan Mantri Awas Yojana, which aims to provide ‘housing for all’, however, access to finance for the buyers still continues to be a strong deterrent to the overall growth of the sector. As per this year’s Union Budget, the government is aiming to provide finance for the completion of 80 lakh houses in 2022-23.
India’s housing finance market has grown at a 15% CAGR over the last six years, but mortgage loans continue to have the lowest mortgage to GDP ratio at ~ 10.4%. This ratio is between 30-60% for developed countries. To counter this, the housing loans with affordable housing schemes have converged under the priority sector lending, and the limits for eligibility have been increased from Rs. 28 lakhs to Rs. 35 lakhs in metropolitan centres and to Rs. 25 lakhs from Rs. 20 lakhs in other centres.
Another welcome development is the emergence of the co-lending model (CLM) in housing finance. RBI approved this model in November 2020, thus permitting banks and HFCs to disburse joint loans to the end borrowers at a low cost through co-lending partnerships.
Furthermore, after ILFS & DHFL Crisis, securing liabilities to match the housing asset long tenor & profile has been tough for HFCs which has led to Asset Liability Mismatch (ALM). Co-Lending is emerging as a solution for HFCs to build and scale housing assets to improve profitability metrics while solving ALM as funds are sanctioned by capital providers to match the asset tenor & profile.
In the co-lending setup, both parties can leverage each other’s strengths to create mutually beneficial and profitable outcomes. Banks can use the partnerships to build a scalable PSL compliant retail portfolio and reach out to the unserved and underserved segments. Thus the partnership helps them grow a portfolio that has otherwise seen declining growth and less interest due to higher OPEX and higher credit costs.
While Banks get stable returns on assets, HFCs on the other hand can generate a high Return on Capital and Equity, achieve higher leverage, and maintain a capital-light model through co-lending. HFCs can also leverage their distribution network to reach out to a wider customer base benefitting from the low cost of funds from Banks.
But in order to scale up these co-lending partnerships, technology will play a critical role. One of the key challenges that the co-lending space has been facing is the lack of solid technology infrastructure. The time taken to integrate systems (LOS and CBS) of any Bank and HFC for co-lending is anywhere between 3-6 months, which is very long. This has limited the growth opportunities and scalability in co-lending.
Digital platforms like CredAvenue are helping bridge this gap by offering a digital marketplace model against a cumbersome-to-operationalize one-to-one integration model. For example, CredAvenue’s CredCo-lend platform offers the end-to-end co-lending infrastructure to aid Discovery, Execution, Fulfillment, Collections, and Reconciliation. This enables both parties to seamlessly collaborate on the platform and go live with multiple partners quickly with one-time API integration.
The Housing Finance sector has been fuelling the rapid adoption of the co-lending model in the country. In fact, we have observed that the issuances in the Housing sector at CredCo-lend contribute about 34.9% of the overall disbursements. Co-lending driven by robust technology will improve the flow of credit to previously unserved or underserved sectors of the economy and make affordable housing a reality in India. CredAvenue is partnering with multiple HFCs like IndiaBulls, PnB Housing Finance, and many more to facilitate co-lending partnerships in this sector and transform and empower co-lending in India.
