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Housing Micro Finance in Rural Areas of India – An Overview

Naya Pakistan Housing Program | www.nphp.com.pk > Housing Micro Finance in Rural Areas of India – An Overview

Housing micro-finance is more appropriately useful for financing houses for rural population.

Traditional housing finance has not offered products adapted to low-income people, but new providers are developing creative approaches to address the problem. A range of financial institutions are adopting best practices in microfinance especially for housing finance, and are successfully delivering much-needed services to housing customers.


Housing microfinance consists mainly of loans to low-income people from rural and semi-urban for renovation or expansion of an existing home, construction of a new home, land purchase, and basic infrastructure (e.g. compound wall, sewage lines, etc). To date, most of the successes in this new field have been with home improvement loans. Land purchase and new housing construction are still dominated by subsidies, rather than financial services.

Housing Microfinance – Demand
The demand for housing microfinance is high. Indeed, microfinance institutions (MFIs) say that clients already diverted a good portion of micro enterprise loans to home improvement. The prime objective of micro finance of housing are:

  • Shelter is a basic human need that helps ensure personal safety and health. Housing microfinance offers small, incremental loans that fit with the way poor people build: progressively and over time.
  • The home is a personal asset that usually appreciates in value over time. Thus, home improvement not only enhances living conditions, it is an investment.
  • Micro entrepreneurs often use their homes as productive assets in generating income. The home can be a place to produce goods, store inventory, and conduct business.

Concept of incremental improvement
The concept of shelter finance values ‘progressive-build’, meaning incremental improvements to existing housing rather than construction of new housing. It recognizes that incremental construction is a way of opening up credit markets to low-income. Progressive-build allows low-income households to borrow what they can afford rather than the total cost of the construction project, which often times would preclude them for borrowing at all.

Market Potential
According to the 1991 Census, in India the rural housing shortage was 13.72 million consisting of 3.41 million households without houses and 10.31 million living in unserviceable kutcha houses. It has also been estimated that another 10.75 million houses would be needed to cover the population growth during 1991-2002, at the rate of an annual growth of 0.89 million houseless-ness. The 1991 Census further indicates that about 40.82% of the total of 112 million rural households remains in one-room tenements, 30.65% in two-room houses and 13.51% in three-room units or more.

In terms of roof type, the percentage of houses having grass, straw and thatch is about 33%, mud and un-burnt bricks 6.05% and tents 4.22%. Apart from this, in terms of quality of walling, 47.27% of the total households have grass and straw walls and about 4% have tent and cloth walls. Nearly 70% of the rural and semi-urban houses are either unserviceable kutcha (9%) or serviceable kutcha (25%) or of semi-pucca (35%) category as per Census 1991. Over 90% of the rural and semi-urban houses have no provision for toilet as per the Census 1991. This suggests that there is a clear correlation between poverty and housing:
a poor person either does not have a house or lives in an unserviceable kutcha house.

In 1998 the Central Government announced that the National Housing and Habitat Policy which aims at providing ‘Housing for All’, with an emphasis on extending benefits to the poor and the deprived. Government is committed to the goal of ending all shelter less-ness by the end of the Ninth Plan period and conversion of all unserviceable kutcha houses to pucca/semi pucca by the end of the Tenth Plan Period. For achieving these objectives, a comprehensive Action Plan for Rural Housing has gone on stream.

Financial Sources for Rural Housing / Marketing Environment
Housing finance sources in developing countries generally fall into three categories or tiers. Th e first tier comprises of private and commercial institutions providing credit for upper-income groups at market interest rates upon the certification of income and provision of collateral. This category of financial institutions has consistently avoided involvement in provision of housing finance for the poor due to their lack of collateral and steady income, the perceived high default risk, and the high transaction costs.

The second source is the public sector, which usually provides subsidized funds for idle income groups and civil servants by way of specialized or non-specialized housing finance intermediaries. Public programs in many developing countries have failed to reach the poor. Public programs attempting to target lower income groups have been hampered by lack of political will, leakage of funds to non-eligible groups due to corruption, or a failure to take into account the socio-economic and political dynamics of the situation within which the poor operate.

The remaining groups—lower middle, moderate, and low-income households, most of whom work in the informal economy—have with few exceptions been excluded from accessing capital from formal private or public financial institutions. These groups have consistently relied on informal sources, including savings, informal loans from money lenders, remittances from family members working abroad, and the sale of whatever assets they have, such as land, jewelry, etc. Housing microfinance programs, administered by microfinance institutions and shelter advocacy groups, have recently emerged to address the shelter needs of these groups and to fill the financing gaps not covered by traditional, more formal institutions.

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