SKS Microfinance, India's largest microfinance company in terms of assets, has tied up with Housing Development Finance Corp Ltd, India's largest home loan provider, for a pilot project to provide loans for improvement of dwellings, primarily to low-income women clients.
The loans will be in the range of Rs50,000-1,50,000 for a tenure of three to five years. The project "will provide loans mainly for extension and improvement of dwelling units which double up for income-generating activities like eateries, kirana shops, papad and agarbathi-making," the companies in Hyderabad.
"We are piloting this in Andhra Pradesh. These loans would be given to borrowers who have a good credit history of three years with us," said Suresh Gurumani, chief executive officer of SKS Microfinance. SKS Microfinance will charge a 2 per cent processing fee and an interest of 21 per cent on a monthly reducing basis.
Renu Sud Karnad, joint managing director at HDFC, said the first tranche of funding of Rs10 crore will be given to SKS Microfinance, and "We will be happy to give more.'' The funds for the project are being provided to HDFC by KfW, a German development bank, under a special arrangement.
Karnad explained the short tenure for the loan saying the microfinance industry market is such that it is better to recover the loan as fast as possible. ''In case of a default it will not be the same as in the urban market, where the property can be sold to recover the money," she said. The buyers for houses and the value in the rural market would be limited, she added.
Most microfinance clients belong to the low-income category and do not have any documented source of income. Operational costs and risks are much higher as borrowers of these loans do not have any income papers or bank accounts and all transactions are in cash.
''The launch of our housing microfinance initiative follows massive demand from our members who have no access to formal institutional funding. The interest rates charged are risk-adjusted rates that compare well with industry rates for urban self-employed and non-formal sector clients,'' said Gurumani.
''This association helps HDFC to contribute to the financial inclusion story of India by reaching services to the grassroot levels. We hope that similar efforts of other MFIs would facilitate in shaping the housing microfinance sector,'' Karnad HDFC said. Other MFIs including Basix and Spandana had offered similar products earlier.