Affordable Housing Surge - What's Fueling the Growth?
Manish Sheth
MD & CEO of JM Financial Home Loans
Transcript
The Affordable Housing Story with Manish Sheth MD& CEO, JM Financial Home Loans
Vivek Ananth: Hello everyone and welcome to another episode of Bazaar and Beyond. Today we deep dive into the world of finance with a special guest, Manish Sheth, MD and CEO of JM Financial Home Loans, a company focused purely on the affordable housing finance segment. Manish, thank you for joining us to decode the 30% growth story in the affordable housing space. I want to start with your personal journey: how did you, as a CA, become the business head running this segment for the past eight years?
Manish Sheth: Thanks, Vivek. I cleared my CA in 2000, and this is my first job. I was born and brought up in JM, starting my career when it was J. M. Morgan Stanley as a tax executive, the lowest entry level. From there to becoming MD and CEO of JM Financial Home Loans has been an excellent journey.
I saw J. M. Morgan Stanley building businesses, and after we parted ways in 2008, we started our own journey. I became the Group CFO and managed our international expansion. Eventually, I felt the need for a new challenge and wanted to do something else. In 2017, I convinced the board, along with our Group Managing Director, Vishal, that affordable housing was an area we should enter.
This is the group's first retail lending business outside of our traditional capital market focus. JM Financial is a 50-year-old organisation, known for IPOs, advisories, and mergers and acquisitions. This home loan business is one of the successful offshoots we have built over the last eight years.
Vivek Ananth: You are a CA, focused on numbers, but you mentioned this is a "touch and feel" business.
Manish Sheth: Yes, numbers occupy maybe 20-25% of the time. This is a highly personal and relationship-driven business. The satisfaction you get when you give somebody a home is very different from presenting your numbers to a research analyst.
Defining the Affordable Housing Customer
Vivek Ananth: Speaking of giving someone a house, who is the primary customer in affordable housing finance?
Manish Sheth: Affordable housing is something everybody talks about, and everyone has a different understanding. Some listed companies might call a ₹20-25 lakh house affordable. To my mind, affordable housing is giving a home to someone deserving who has been excluded from the formal lending channel.
In terms of formal definitions:
RBI/Priority Sector Lending: This is based on loan and house value. In metro cities (population over 50 lakhs), a house worth ₹63 lakhs or a loan up to ₹50 lakhs could qualify. In Tier 2 cities, the loan limit is ₹45 lakhs.
NHB/Government Schemes: These focus on income.
EWS (Economically Weaker Section): Household income under ₹3 lakhs per year.
LIG (Low Income Group): Household income between ₹3 lakhs and ₹6 lakhs per year.
The real affordable housing players focus on ticket sizes between ₹10 lakh and ₹25 lakhs, depending on whether it is a Tier 2 or Tier 3 city.
The Evolution of PMAY Subsidies
Manish Sheth: The Government's focus under PMAY-2 has relaxed norms and made them more meaningful. For instance, if you and your wife come as borrowers, your wife must be one of the owners, and you must not own any other house in India. Previously, the government gave ₹1.5 lakh to ₹2.5 lakh as a lump sum subsidy under PMAY-1.
Now, under PMAY-2, the subsidy is paid in five buckets over five years, provided you keep paying your EMIs. We disburse ₹50,000 every year. This approach allows the government to create a five times greater impact with a similar budget. It is an interesting product.
When I started, I never thought government schemes and subsidies would be so effective. Now, all we have to do is upload the file; the borrower receives an OTP directly from the government. Once the fulfilment conditions are met (no other house, wife as owner, etc.), you receive the money within 30 days. We then credit it and ask the customer if they want to reduce their EMI or their tenure.
Vivek Ananth: So, the onus is also on the housing finance company to process the credit quickly.
Manish Sheth: Absolutely. The NHB is very efficient. While state governments occasionally offer additional subsidies, the central government drives the main housing agenda.
The Challenge of the Rising Housing Deficit
Vivek Ananth: There is a significant housing gap: a deficit of units versus demand, which seems to be rising, concentrated in urban clusters. What is driving this deficit?
Manish Sheth: It is a combination of factors. As of now, the ministry reports a shortage of 1.1 crore houses, which is projected to rise to around 3 crores by 2030. This is driven by:
Nuclearisation of families.
Migration from Tier 4 to Tier 3 and Tier 2 cities.
Reverse Migration: Interestingly, we are seeing IT parks and GCCs (Global Capability Centres) being built across the country. People now prefer to stay in their hometowns, like Indore, for better lifestyles rather than migrating to Bangalore or Hyderabad. BFSI companies are also considering this to manage the high cost of structures in cities like Mumbai.
The government is also considering the needs of migrant labour, for example, those building national highways, who need temporary rental housing for two to three years. If you factor in this rental housing demand, the actual unit requirement is much higher than the 3-crore permanent home shortfall. If you divide India's population by four, there are about 35 crore families. A 3-crore shortfall is a significant number.
Why Developers Avoid Tier 2/3 Cities
Vivek Ananth: If the demand is high in Tier 2 and Tier 3 cities, why are Tier 1 real estate developers not entering this market?
Manish Sheth: In Tier 2 and Tier 3 cities, the land is available, but organised construction is not happening. There are no Tier 1 developers there; they are mostly local contractors who build 10 to 12 small houses a year. It is difficult for Tier 1 developers like Oberoi to expand. They face issues with land acquisition, obtaining approvals, sourcing suppliers in new cities, and ensuring profitability. Because of this complexity, Tier 2 and Tier 3 cities are dominated by local developers, and often the land records are not digitised.
Due Diligence: The Smart City and Zomato Test
Vivek Ananth: As you expand into new cities, what is the due diligence process you follow?
Manish Sheth: This is an interesting question. We have a full checklist divided into two parts:
City Infrastructure and Stability:
Is it a Smart City? This means the Government of India has already done some initial due diligence.
The "Zomato Test": Is Uber or Zomato available? This indicates a certain level of formalised commerce and consumer behaviour.
Stability of Government: Political and regulatory stability is crucial for expansion.
Collateral and Economic Research:
We maintain 30-40 unique collateral policies across 130 cities because property laws can vary wildly (e.g., Nagpur Municipal Corporation vs. Investment Trust properties).
When we entered Surat, we layered our plan with JM research reports on the stability of key local industries like diamonds and textiles for the next 10 years.
We then analyse customer behaviour to tailor our approach.
Policy Support and Tapering Off
Vivek Ananth: Do you think the continuous policy support for affordable housing will continue, or can the government taper it off, much like the caps put ATC deductions in the past?
Manish Sheth: It is too early to answer. The government has no choice but to support housing and housing finance until the 3 crore shortfall is addressed. This is true for any government, be it BJP or Congress. They must support this specific category of EWS and LIG customers.
The government did withdraw the MIG (Middle Income Group) scheme in 2017, which supported families with incomes of ₹12-18 lakhs. They decided that this segment was no longer the one that needed state support. However, for a customer with a household income of ₹3 lakhs, support is still necessary.
The central government worries about the people in Kakinada or Tirupur, who have very low incomes and no house. They are less concerned with high-MIG customers in major metros who still have options, even if the city is expensive.
Affordable Housing and Economic Cycles
Vivek Ananth: While large cities have seen slow real estate cycles, affordable housing has seen steady growth. Do you feel this segment is resilient to economic downturns?
Manish Sheth: Affordable housing is attached to economic downturns. For instance, in Morbi, we have 30 players all doing similar business. But when the diamond industry saw a downturn, the Surat market share for the entire industry was wiped off. When I am asked about economic downturns, I always explain my customer base: someone earning ₹20,000 a month pays a ₹10,000 EMI. If they miss one payment due to a health issue, paying two EMIs is a challenge. If they miss three, they have to sell their house. They prioritise their EMI because their house is their biggest asset and security.
Product Mix: Home Loan vs. Loan Against Property (LAP)
Vivek Ananth: Could you explain the products in the affordable housing space and the associated risks?
Manish Sheth: A housing finance company typically has two main products: Home Loan and Loan Against Property (LAP), with various variants.
Home Loan: In Tier 2/3 cities, this is often for self-construction or plot-plus-construction. Since the house is the borrower's self-occupied residence, the chances of default are lower due to the emotional attachment.
LAP: This product often offers a better yield but carries higher risk. We constantly monitor the end of use, as mandated by the RBI. Is the LAP being taken to stock up inventory for a three-month festival season (using a 15-year loan)? Or is a salaried person using it to start a high-risk restaurant business? We have seen interesting cases, like a government employee taking LAP to fund her daughter's medical education.
We also differentiate based on collateral: self-occupied or rented property. If a property is rented, the borrower might see it purely as an asset to liquidate if their venture fails, making it riskier.
The Liability Game and Digital Limits
Vivek Ananth: You mentioned that housing finance is a "liability game," not an asset game. What do you mean?
Manish Sheth: We all think housing finance is an asset game, but it is a liability game: it is about Asset-Liability Management (ALM). Unless you have the right liability, you cannot compete. NBFCs and HFCs are "para-banks." We originate loans and take the risk, often lending to "new-to-credit" customers whose behaviour is unknown. They can access SBI at 9%; if we do not have a strong liability profile, we cannot offer competitive rates.
Vivek Ananth: The industry is digitising fast. How is a "touch and feel" business like yours competing?
Manish Sheth: All our customers are smart and have smartphones. The issue is that the property records in Tier 2 and Tier 3 cities are still not digitised. On the day that happens, we will see a change in the sea. While India Stack, UPI, and Aadhaar help us get most of the data sitting in our office, we still must conduct field investigation. For a self-employed customer running a Kirana shop, we physically visit, take photos of the stock, and understand how many years the person has run the business. This is crucial because 60% of our customers are self-employed and constantly changing their business models.
You cannot standardise affordable housing. On the day it is fully standardised and digitised, this business will move completely to banks. Our existence is justified because the income papers of our customers are not easily verifiable, which is why they come to us instead of SBI.
Lessons Learned: The 24-48 Rule
Vivek Ananth: After starting this business, what was one initial assumption or plan that you had to completely change or discard?
Manish Sheth: We hired one of the top consulting firms, and I paid a substantial amount for a presentation detailing the exact "swim lanes" for how we should do business. I called the consultant for lunch later and told him, "The way I built this business now, you should tell your customers how to build it."
I have a "24-48 Rule": We make a lot of plans sitting in an air-conditioned office at 24°C. When you go to 48°C in a city like Dhule, you realise that the customer on the ground is different. The risk you have to see is on the ground; you cannot see it digitally on your screen. That is the most important lesson.
Vivek Ananth: We do not see many Fintech-focussed players getting into housing finance. Do you think there is an inherent deficiency they cannot solve for?
Manish Sheth: Exactly. Fintechs specialise in unsecured lending. When it comes to housing finance, they struggle because they cannot solve the problem of property papers, land titles, and physical verification that is still required for secured lending in India. If property records become fully digitised, then Fintech is of no use. No bank would enter, rather, a bank would acquire Fintech.
Vivek Ananth: Interesting. Sir, last question. I asked this to most of our guests. Any favourite books that you have? So, any podcast that you listen to or any film? Is there anything that you have on your mind?
Favourite Books and Films
Manish Sheth: Film, I love Nayak. That is a very different film to the one which I have seen because it focuses on the necessity of decision-making. The message from that film, which was originally the Tamil movie Mudhalvan and then remade as Nayak with Anil Kapoor, is very clear: you are there to take a decision, and you must take the decision on that day. Simple. And that is what I do every minute. As a CEO, every decision has to be taken then and there only. You cannot say that "I will just check with my board." That is very important, and that comes with one gut feeling and a second with experience.
Vivek Ananth: All right. Any books if you have something.
Manish Sheth: I love only one book: How to Win Friends and Influence People.
Vivek Ananth: That’s a fantastic recommendation. We’ve had previous guests mention it as well. It’s definitely one for the list. Thank you so much for your time today, Manish. It’s been an incredibly engaging conversation, and I’m sure our viewers will have gained a lot from it.
Manish Sheth: Thank you, Vivek. It was a pleasure to be here, and I look forward to doing this again soon.
Closing
Vivek Ananth: And to our listeners, remember stay informed, stay curious, and keep investing wisely. Until next time, goodbye!
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