An Idea Whose Time Has Come

Published: August 27, 2009 in India Knowledge@Wharton

Affordable housing is the Indian government’s new mantra. President Pratibha Patil mentioned it in her speech on Bharat Nirman, a project that plans to double the construction of low-cost houses to 12 million units. This move, it is hoped, will cascade into more demand for steel, cement and construction material. For this to happen, the government is banking on public-private partnerships. In the past, even if developers were willing to build housing structures for the poor, they found it difficult to come up with suitable ways to finance them. Now, given the fresh optimism in the market, it seems like affordable housing is an idea whose time has come, writes Bangalore-based writer Shoba Narayan in this opinion piece.

A story is sometimes told about the Tamil Nadu government magnanimously building Lower Income Group (LIG) apartments for squatters who made a living by milking buffaloes and selling the milk to the neighborhood. The flats were ready and after a ribbon-cutting by an officious minister, the milkmen and their families were ceremoniously ushered into their spanking new homes.

A month later, neighbors awoke to the sight of a buffalo staring back at them. The milkmen had decided that their buffaloes gave more milk when they were housed in comfortable quarters. So they went back to their coir beds under the night sky and corralled their buffaloes — dung and hay intact — inside their tiny one-room homes. All of which goes to show that money is not the only consideration when building homes for the poor.

I recount this story to Naresh V. Narasimhan, partner and architect-principal for Venkataramanan Associates, a Bangalore-based architectural firm whose clients include Infosys, Biocon, TCS, iGate and the World Bank. A leonine man with a wry sense of humor, Naresh, as he is called, tells me that most state-sponsored interventions for affordable housing are “usually quite patronizing with no attention to design.”

Anyone who lives in urban India can attest to this reality. Slums and shantytowns typically have one room in which the entire household eats, sleeps and does everything in between. A typical 400-sq.-ft. home would contain a family of four, in-laws, and visiting cousins from the village who would sleep under the bed. “It is a global paradox,” says Naresh. “The smaller the unit, the more people live in it. The larger the house, the fewer people it contains.”

So far, the design model for affordable housing has been to compress a home into a single room with no toilet inside. Instead, women have to walk through a scorpion-infested courtyard to a common toilet at night. When Naresh started designing affordable housing, he says, simply building a toilet inside the house was seen as hugely empowering, particularly for women. “It gives them a sense of dignity.”

Affordable housing is the current Indian government’s new mantra. President Pratibha Patil mentioned it in her speech on Bharat Nirman, a project that plans to double the number of low-cost houses that are to be constructed to 12 million. This move, it is hoped, will cascade into more demand for steel, cement and construction material.

For this to happen, the government is banking on public private partnerships (PPP). This implies that government will set up the enabling framework and private sector players like developers and microfinance institutions (MFIs) will partner to deliver the affordable housing units. Traditionally, developers have been slow to target this market. It seemed easier and more profitable, at least so far, to make money in middle to high end housing units.

Financing is another issue. Even if developers were willing to build appropriate housing structures for the poor, they found it difficult to come up with suitable structures to finance them. Now, given the fresh optimism in the market, it seems like affordable housing is an idea whose time has come. About time, I say.

The numbers are both daunting and promising to marketers. According to the latest research by Unitus Capital, India has a housing shortage of 40.3 million units. Assuming that five or seven people live in a unit (the Indian average is 5.5 per household), that’s more than 250 million people — about a fourth of the Indian population without adequate shelter.

Last year, the Monitor Group put out a comprehensive report addressing the state of affordable housing for the urban poor in India. The report estimated that 21 million (as of 2008) households do not have a proper home, due to lack of land titles and volatility in earnings on a day-to-day basis, with incomes ranging from a dollar a day to about US$250 per month.

Leaks and Loans

The challenge lies in structuring a solution. The government has tried, mostly by building LIG apartments and offering loans to the poor. Since its inception in 1970, HUDCO (Housing and Urban Development Corporation) has disbursed millions of dollars worth of housing loans to the poor and Economically Weaker Sections (EWS). The problem is that there is severe leakage in funds as they traverse from center to state to local administration so that poor individuals either don’t get anything or get only part of what is due to them. To combat this, HUDCO Niwas was established in 1999. This loan scheme disbursed directly to individuals rather than through the state governments. Even this is fraught with inefficiencies. Critics say that a giant national organization like HUDCO cannot behave like a local loan-center. HUDCO’s budget is huge. By some estimates, just in the last two years — 2007 to 2009 — it has given loans worth over Rs. 4000 crores (US$850 million), primarily to EWS, which comprise 92% of its customer base. In spite of spending large amounts, the urban poor are without quality shelters, given the rampant leakages in project execution.

When the Monitor Group talked to developers, most said that the low-income market was a viable one for them, except for financing issues. The poor themselves are eager to own a home and willing to pay and sacrifice for it. Banks and Housing Finance Companies (HFCs) want to lend to this sector but cannot solve the high transaction costs and perceived credit risk. The only way to recover loans — and even that is dicey, they say — is to take defaulting customers to court.

These risks apply to the non-banking finance sector as well. Microfinance institutions (MFIs) have an advantage in this area because they know their customers and can gauge how much credit risk these low-income people can tolerate. Recently, alumni of American Express and the Monitor founded Micro Finance Housing Corp (MFHC), India’s first housing-loan company that combines the advantages of a bank and MFI in one entity. MFHC gives loans of about Rs. 5 lakhs (US$10,000) for a tenure of 15 years at a prime-lending rate of 12% using the home mortgage as security. It has tied up with low-cost developers including Shubhgriha by Tata Housing, Global City (a Rustomjee/Evershine joint venture), Shree Vaishnavi Constructions and Tanaji Malusare City. All these projects are in Maharashtra — in Virar and Karjat.

The attraction for MFIs is that some of them who remain connected to their customer base understand the urban poor consumer psyche better than the regular mainstream bankers. For instance, most poor households can afford to pay regular small sums every day over a long period to the MFI loan collector. But ask them to provide up-front advances and large monthly payments, and chances are they will default. Some MFIs understand this better than others and are willing to structure arrangements that involve daily collections against the house purchase.

Critics of the MFI model highlight its inherent fallacies. As Aneel Karnani, a professor of strategy at Michigan’s Ross School of Business writes, “Beneath these beliefs in the market-readiness of poor people lies a more basic assumption: People in dire straits are well-informed and rational economic actors. Yet this view denies the fact that poor people often act against their own self-interest. Of course, wealthier people sometimes do so, too. But poor people face far worse consequences for their bad choices than do more affluent people. And so romanticized views of Bottom of Pyramid (BOP) people as value-conscious consumers and resilient entrepreneurs are not only false, but also harmful. These views lead states to build too few legal, regulatory, and social mechanisms to protect the poor, as well as to rely too heavily on market solutions to poverty.”

Karnani’s view isn’t completely right, but neither is it entirely wrong. Anyone who employs help in India can attest to that. When a driver with no savings and five mouths to feed walks out of a job because his employer chastised him for being late, does it show self-respect, high tolerance for risk or simply a bad irrational choice? Sure, the poor are resilient. They have to be. But the market is also ruthless. A child falling sick with malaria can wipe out money saved carefully for months on end.

Ruthless Logic of Markets

Social entrepreneur Ramesh Ramanathan takes the middle ground. A passionate believer in free markets, Ramanathan left a high-flying career as head of corporate derivatives in Citibank’s London operations and returned to his hometown, Bangalore. Together with his wife, Swati, he co-founded an NGO called Janaagraha that aims to improve citizen participation in government. “I believe in the power of the market to solve the problems of the poor, but I also recognize the danger of markets,” he says. “There is a ruthless logic to markets which is why they are efficient. You need to build institutional mechanisms to harness the market’s power. At the same time, you have to check the market’s ruthless tendencies so that it doesn’t take you away from your soul.”

A boyish man despite his salt-and-pepper hair, Ramanathan exudes confidence and passion in his agenda to get Indians to take charge of their destiny. This commitment has garnered him credibility and goodwill among government and corporate philanthropists. Last year, the Susan and Michael Dell Foundation gave an unprecedented US$2 million grant to one of Ramanathan’s projects, called Janaadhar, to build affordable housing for the poor. The money was used to buy land off Hosur Road in Bangalore near Electronics City. Ramanathan also serves as Advisor of the Jawaharlal Nehru Urban Renewal Mission (JNURM), a US$12 billion Central Government initiative which allocates funding to different states to ensure basic services like housing and infrastructure, urban reforms and strong municipal governments.

Janaadhar grew out of Janalakshmi, Ramanathan’s microfinance company. My maid, Geeta, is a typical customer. Fifteen years ago, nobody would lend to her. Illiterate but intelligent, Geeta’s means of raising money was to visit usurious money lenders, using her jewelry as collateral. Today, she and nine other women join together and borrow Rs. 20,000 which they then split amongst themselves using a rotational method. If one of them is in dire straits, the others have to make up her loan repayment so that the group doesn’t default. The system seems to work because Geeta and her cohorts have borrowed for a second time.

Janalakshmi, which was set up in 2006 to lend to the poor, has a two-tier institutional set-up — the Janalakshmi holding company, which is a Section 25 non-profit, and Janalakshmi Financial Services (JFS), which operates for profit but funnels all its profits into the holding company. “As a promoter of the institution, I don’t get wealthy,” says Ramanathan. “I can look a person in the eye and say that I believe in the power of the market but not necessarily by the same greed that is driving some others.”

Janalakshmi, like many MFIs, lends to women through Self Help Groups (SHG). I asked Geeta why she chose Janalakshmi to borrow from. She said there was one other microfinance company that came to her slum. “The problem with the other MFI is that they hold meetings once a month for two hours and make it compulsory attendance,” said Geeta. “Plus, they insist that I appear in person to borrow and return the loan. How can I do that when I work all day?” Janalakshmi, according to Geeta, has a more flexible model where the 10 women can repay their loans to the leader at any time, who in turn repays it on a monthly basis to Janalakshmi. And as a bonus, there are no meetings.

With some 20,000 non-defaulting Janalakshmi customers, Ramanathan began looking at taking it to the next level. “Unfortunately, the practice of microfinance in the last two decades has romanticized the group as a structure by which we lend to women,” he says. “Why are we elevating the group to such an extent? At the end of the day, none of us professionals working in microfinance access our financial needs through a group. Why is it that what’s good for us is not for the poor?” he asks.

Peer Pressure

The answer, as everyone in microfinance has realized, is that the group is a mechanism by which the poor access finance and also acts a peer pressure ensuring low defaults. But that doesn’t mean that the model is perfect. Take Geeta, for instance. In addition to borrowing from Janalakshmi, Geeta takes cash “advances” from me, her employer, on a need-basis. This is typical in India. Every now and then, I will lend her Rs. 20,000 (US$450) and she will repay it in lots of $50 taken off her $150 monthly salary. The point is that she (and others like her) can sustain borrowing and repaying nearly 60% of her monthly salary. Her loan appetite and ability to repay these loans is higher than what she borrows from Janalakshmi. The real challenge for MFIs is to move poor individuals like Geeta from the group model to an individual one. “The group is like scaffolding,” as Ramanathan says. “We want our customers to move from the group towards more permanent financing structures by accessing finance individually.” To that end, Janaadhar’s explicit goal is to work with individuals in terms of building them homes and also helping them secure financing for it.

With the global recession, several companies are looking at the sub-prime market. Ahmedabad-based MAS Financial Services is one such company. With 250,000 customers, each of whom has completed seven cycles of loans, MAS, which has been in operation for 18 years, knows exactly how much appetite for credits its customers have. Developers, too, have jumped on the bandwagon. They include Tata Housing, the Godrej Group, Ansal Properties (10,000 homes in UP and Rajasthan), Foliage Developers and Neptune Builders. These real estate companies are funded by banks such as State Bank of India and HDFC, which is also financing Mphasis founder (and ex Citibank India head) Jerry Rao’s affordable housing project, Value & Budget Housing Development Corporation and MFIs. Rao views housing as “inventory” which the developers ought to build cost-effectively and sell quickly before moving on to the new project. The efficiency of this system will make it economically viable as opposed to previous models in which builders held on to flats in the hope that they would rise in value.

Backed by government agencies such as the National Housing Bank (NHB) and National Bank for Agriculture and Rural Development (NaBARD), MFIs like MAS can lend to the poor at an interest rate of 12% to 15%, as opposed to a traditional bank’s 8%. This spread, while wider than traditional banks, is commensurate with their risk. And that is where they make their money. For the poor borrowers, these rates are much lower than current market rates that are upwards of 36% per annum.

Matheran Realty

There is a reason why MFIs are thriving in the housing sector. Until now, the real estate boom in India meant that developers and builders could make money by simply catering to the premium market. With the premium market having fallen in some places and tanked in others, developers are now eyeing low-cost (affordable) housing for the first time. Both MAS and MFHC have tied up with Matheran Realty, a firm that specializes in flats ranging in size from 300 square feet to 700 for one of India’s most ambitious affordable housing projects. Titled Tanaji Malusure City (TMC), it will be spread across 100 acres in Karjat, outside Mumbai. Its 15,000 homes of 200, 300, 400 and 500 sq. ft. attracted 70,000 buyers. This is not surprising. According to the UK-based Noble Group, India’s savings rate of 37.7% make it among the highest in the world. Even the poor in India, who are supposed to live a hand-to-mouth existence (and many do), can save to buy a home, it seems.

The government, too, has an interest in affordable housing. TMC, for instance, is a partnership between Matheran Realty and the Mumbai Metropolitan Region Development Authority (MMRDA) which wants to develop Karjat as a satellite town to ease Bombay’s congestion. Matheran Realty says that its apartments will cost between Rs. 2.1 lakh and Rs. 7.35 lakhs (US$4,200 and US$14,700). Like any satellite development, TMC will have schools, hospitals, shops, commuter buses and even malls and multiplexes.

In all real estate developments, securing land is the big issue. TMC got its land because it is a private-public partnership. Janaadhar bought land because of the Dell Foundation’s munificence. One result is a fairly high corporate governance standard. After using the money to buy land and sort out title issues, all of which take time in India, Ramanathan went to all the leading real estate developers to get them involved in the project. “They gave us samosas and chai and a lot of reasons why they couldn’t get involved,” he says with a laugh. “Some said that building low-income housing would spoil their image as premium builders. Others said that it was a good idea but not a good fit for them.”

Ramanathan finally signed up with Sterling Developers and architect Naresh for designing and executing the project. There will be 1300 flats, two-thirds of which will be 400 square feet and one-third, 600 square feet. The entire mortgage risk will be underwritten by Janalakshmi. “In real estate, it is very easy to lose sight of who the end customer is,” says Ramanathan. “We have to keep reminding ourselves that we want to deliver homes at the lowest possible price.”

Naresh says it another way. “The challenge will be to keep the damn speculators away.”

Sustainable Construction

Securing funding for land is one thing. Designing the actual homes is another. One way to keep costs down is to explore green building techniques. The Monitor Group has come up with an exhaustive report about alternative building methods, ranging from composting toilets, rubber wood doors, mud rammed earth, red oxide floors, solar lighting and rainwater harvesting. The problem is not just one of sustainability, though. It is also about perception of what constitutes a good home for an upwardly mobile family, poor though it may be. As Naresh says, “I can go blue in the face saying that mud walls are sustainable and eco-friendly, but whenever I build mud homes for poor people, they all want concrete homes — just like us. It is about aspiration, you see. Not just the environment. They want homes like us — with concrete walls, proper roofs and garish paint.”

Other countries struggle with poor housing, too, but Naresh says that none of those models are relevant to India. “Banlieue in Paris, where all the riots happened, is a classic example of how not to do affordable housing,” he says. “With India, you have to drop all the old paradigms and start afresh. For example, the idiotic idea of separating the workplace from the home doesn’t work in India — as Dharavi proves so eloquently. That’s what makes this project exciting for architects like me.”

The thing with designing low income homes is that it impacts so many social indicators like teenage pregnancy, drug use, literacy and others. Experts say that cities have to figure out their model — whether to relocate its poor to the outskirts (Banlieue) or satellite cities like Karjat; or keep them enmeshed within the city, given that most of the poorer sections service the middle- and upper-class areas of cities. Land is a challenge and rates within urban cities are unaffordable, leading many to plan low cost projects on the city outskirts. The challenge in such cases will be to provision transportation and civic services for these dwellers. Matias Echanove is an urbanologist who moved from Tokyo to Mumbai. I called him to ask about how cities could urbanize affordably and effectively.

“Affordable housing benefits the construction industry because you can build these high-rises very quickly and cheaply,” he replied. “But there is not a single instance where mass low-income housing has succeeded. In most cases, as in France’s Banlieue, it has failed dramatically. People feel excluded. These artificial satellite cities don’t generate their own economic activities. That is the big, big disadvantage. This model relies on people commuting to cities.”

It is true. Most of the help that services cities like Mumbai travel from afar to come into the city by 8 a.m. Most leave their homes at dawn and return at midnight. What Echanove is suggesting is the complete opposite of existing models. Instead of sweeping the poor away into faraway satellite townships, he is suggesting that the rich move to these very same distant locations and energize them.

Lesson from Tokyo

The model, according to Echanove, is Tokyo, which has urbanized through infrastructure retrofitting. In other words, Tokyo’s government allows the poor to build their own homes in an organic way and simply helps them with electricity, sanitation and amenities. “Japan’s government could not build houses for the massive influx of people into cities because it was bankrupt after the war,” says Echanove. “In that sense, its approach is very pragmatic because affordable homes have developed incrementally. If you look at the urban typology of suburban Tokyo, it is the same as the slums of Bombay: low rises, high density, small buildings, lots of pedestrians, narrow streets, very strong local interwoven economy, artisans and small businesses. All this is very empowering for poor people because they have a say in their future. Plus the economy develops from the ground up.”

Echanove and some colleagues run Urbz, an urban user-generated collective ( which conducts workshops on community participation in urban planning. He championed the cause of Dharavi’s residents through a website called Unlike Europe and America, says Echanove, “India is in a unique position to start doing what has always happened in the past but never seen as a benefit. India can help people chart their own futures and build their own homes.”

There is much sense — and arguably much naivete — in what Echanove says. I don’t doubt his expertise. He, after all, has lived and worked in Dharavi. Still, his belief that slum dwellers can chart their own destiny and build their own homes is at odds with say, the Singapore model, in which Big Brother decides a prudent mix of Malays, Chinese and Indians in every government housing complex. Not only that, Singapore’s government decides the exact mix of lower, middle and upper classes who occupy these dwellings.

Down the road from my new condominium is a tiny slum. The milk-lady who sells me cow’s milk every morning lives there. She brings her six cows right in front of my apartment complex in the morning and milks them right then. Army wives from the cantonment across the street line up for milk. They chat, exchange notes and bargain for the best cow’s milk. For now, my street is a vibrant mix of cultures and classes: frugal, yet comfortably off army families, new developments such as mine and poor housing. My milk lady lives in a slum. There is no other way to describe it. And in spite of the conveniences her proximity affords (both for her and us), her own home and surroundings are small fly-infested rat-traps with poor sanitation, hygiene and light. I took a turn into her home once to question the quality of milk she had given me that day and was appalled at how she lived. Offering a home to my milk-lady in Bangalore’s equivalent of Karjat (satellite town) would no doubt improve her home environment. But it would take away her livelihood. And therein lies India’s housing conundrum. After all, a home doesn’t exist in a vacuum. It needs life, and a livelihood to sustain it.



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