14%

(~9MM)

Cost : Rs 450,000 to 600,000 Less than top 16% of Urban Indian households can afford to own houses Property rates across various cities suggest that it should be commercially viable to build affordable housing in the suburbs for low income customers in urban India

1 Excluding the recent economic downturn; 2 2005 data- based on the report done for NHB in 2006 Source: NHB Trends in Housing; CRIS Infac Report; Monitor Research 4 Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND

Low Income Housing not Low Quality Housing Pilot Project- Layout of Building

5 Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND

Context

Low Income Housing: Social Need and Willingness to Pay

Detailed customer research and our interaction with over 2,000 customers on the ground showed high need for a “house of their own” among people living in appalling living conditions

Profile - Nathubhai



Has steady job as a factory worker in a textile enterprise in Ahmedabad



Monthly HH income ~ Rs 8000, savings up to Rs 900 - 1000 p.m.

    

Lives in 1RmK in low income neighborhood, Rent Rs 1800 Family size 5 with mother, wife and 2 children Assets – Bank Account (ICICI), Life Insurance (Rs 3L), TV set Education

–

Both children attend private Gujarati medium schools Rent

–

Increased by 50% in past 3 years and moved every 2 to 3 years Appalling conditions of Slum-Dwellers



Live in poorly constructed small cramped houses



Poor sanitary conditions – shared toilets, bad drainage, water logging during monsoons



Lack of facilities – properly planned access points, walkways, gardens, dedicated schools etc. Profile - Ganesh



Self-employed Mechanic in Mumbai



Monthly HH income – ~Rs 11,000, savings up to Rs 1000 p.m.



Lives in 150 sq. ft. room in slums, Rent Rs 2400

 

Married with wife and 2 children Assets – Bank Account (ICICI), Life Insurance (Rs 1.5L), Refrigerator and Personal Computer



Education

–

Both children attend English medium school



Rent

–

Has seen significant & frequent increases in rent, has moved house 5 times in 12 years Both share a dream… “A house of their own”…….

Can afford a 250 to 350 sq ft house, willing to make 20% down payment &

Source: Primary Research (n=2000), Monitor Analysis

pay 35% of monthly income as EMIs to realize their dream

6 Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND

MHI 1 (Rs)

Context

Low Income Housing: The Economic Potential

The low-income housing segment (MHI of Rs 5,000 – 20,000) is estimated at 22 Million households with an estimated opportunity size of Rs. 1,100,000 Cr and is largely underserved

Urban Income Pyramid >80000 40000 –80000 30000 –40000 20000 –30000 1% (0.7MM) 5% (3.4MM) 4% (2.7MM) 5% (3.4MM) Offering & Supply of Housing Supply of Housing Finance



Price of unit 2 > Rs 25 Lacs



Potential demand from ~2 M HHs with estimated Market Size of ~Rs 500,000 Cr



Various mortgage finance options available for segment

 

Various mortgage finance options available for segment Potential size of mortgage market ~ Rs 400,000 Cr



Price of unit: Rs 10 –25 Lacs



Mortgage finance available broadly



Potential demand from ~5 M HHs with estimated Market Size of ~Rs 900,000 Cr



Potential size of mortgage market ~ Rs 675,000 Cr



Mortgage finance available broadly 10000 –20000 5000 –10000 <5000 22% (15.0MM) 31% (21.1MM) 33% (22.4MM)



Price of House: Rs 3 –10 Lakhs



Potential demand from ~ 22 Mn 3 with estimated Market Size ~Rs 1,100,000 Cr HHs



Severely constrained supply of housing finance for informal sector



Finance available for MHI > Rs 12K in the formal sector, limited availability below MHI of Rs 12K for formal sector and 20K for informal sector



Potential size of mortgage market ~ Rs 8,80,000 Cr

Note: 1 Monthly Household Income; 2 Affordability defined as households which have EMI / MHI Ratio of 40% of a Home loan which has a 20% down payment on an Home value, EMI level of Rs 1,200 per Lac (at 12% interest for a 15 year loan); 3 Conservative estimates that 60% of total households in MHI of Rs 5-20K (36Mn) are renting and looking to buy a house of their own.

Source: NHB Trends in Housing; CRIS Infac Report; Monitor Research 7 Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND

Market demonstration of Demand

There is increasing construction of low income private sector housing projects across India

Large real estate players like the Tatas and entrepreneurs like Jerry Rao are starting to recognize the business potential of low income housing and constructing large projects, thereby giving the field increased credibility Mumbai :Ambivili Neptune Group

100 acres Phase 1: 1800 units; Sector 1: 600 flats sold out in 3 days 1-BHK and 2-BHK Rs 4.73 Lakh and Rs 8.40 Lakh

Maharashtra: Boisar Tata Housing

67 acres: Phase 1: 1200 units for LIH 1-RMK and 1BHK Rs 3.9 Lakh and Rs 6.7 Lakh

Ahmedabad: Vatva

Taral Bakeri

Phase 1: 800 units Price: Rs 3.3 Lakh – 5.6 Lakh

Bangalore: Atibele Janadhar

11 acres: 1500 units 1BHK and 2 BHK; Rs 4 Lakh and 6 Lakh

Bangalore: Value Budget Housing Development Corporation

Rs 3-9 Lakh townships on minimum 10 acre plots; 1 Million intended flats

Ahmedabad: Vatva Foliage Developers

Phase 1: 400 units Price: Rs 2.81 lakh upwards

Maharashtra: Karjat TMC – Matheran Realty

15,000 units by June 2011; 3,000 units in Phase 1 – June ’09 6,000 flats @ Rs 3 Lakh Source: Monitor Research 8 Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND

Monitor’s activities for the past two years Facilitating Low Income Housing: “Doing what it takes”

Encouraging Developers

 Conveying the opportunity  Arranging customer financing  Obtaining customers  Sharing “best practices” (architectural designs, site layouts, etc.)

Dissemination

 Press including Real Estate trade journals (over 20)  Conferences and group sessions (over 30)  One on one meetings with broad range of stakeholders (over 400)

Building the Ecosystem

 Existing and new players for mortgage finance (including incubating a housing finance company)  PE and VC funds (incubated a USD 100 Million housing ecosystem fund)  Research on optimal architectural designs, low cost construction technology, sustainability etc.

Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND 9

Financing Low Income Housing: Market Potential 1. Context: The Business Opportunity and Social Need 2. Economic Potential

10 Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND

Context

A Stand -Alone Low Income Housing Business: Outline

The business will primarily focus on the urban customer in the Income Group Rs 5-15K who does not have to access to a home loan facility

Customer Profile and Focus



Urban

The need for low income housing and home loan financing is

especially acute in urban areas

, which are seeing rapid population expansion through migration from rural areas 

Reach:

The HFC will have an urban focus and will establish presence in Metros and surrounding Tier I/II/III cities 

Branch: Hub and Spoke model

with 55 branches by Year 10  Target Monthly Household Income range:

Rs. 5,000 – 15,000

 Both

salaried customers

who are

unable to access home loans

and

informal sector customers

, i.e. self-employed and salaried unorganized individuals

Product Offerings and Pricing Structure Primary Product: Loan for home purchase



Loan Amount: 2 – 8 Lakhs:

Families earning between Rs. 5,000 and 20,000 can afford homes costing up to

40 times their monthly income

, i.e. Rs. 3 – 10 Lakhs 

Loan to Value: 50 – 80%: A minimum of 20%

equity from the customer will help mitigate the financier’s risk, while ensuring that the loan is not sub-prime 

Installment-Income Ratio (IIR): 30 - 40%:

This income group typically pays between 20 - 25% of their monthly incomes as rent, so a

30 - 40% EMI is feasible



Loan Tenure: 6 – 15 years:

Will vary based on the customer’s income

Pricing Structure



Adjustable Rate Mortgages

with typical interest rates between

11 - 15%

based on down-payment amount, IIRs, loan Tenure, and perceived risk profile of customer; and allowing approximately a

3-4% spread



Processing fee of 1% of loan value

to re-cover loan origination and credit check costs 11 Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND

Economic Potential

Revenue Potential for a Low Income HFC

It is estimated that at the HFC will achieve significant growth over 10 years – disbursing close to 2,60,000 loans worth ~ Rs. 10,000 Crores

Portfolio Growth Projections over 10 years Assumptions 1

300,000 250,000 200,000 150,000 100,000

Cumulative Number of Loans Disbursed

50,000 0 Y1

500 1,500

Y2

3,750

Y3

9,375

Y4

18,750

Y5

37,500

Y6

65,625

Y7

114,844

Y8

258,398 172,266

Y9 Y10

10,336

 Since the HFC market is extremely underpenetrated – it is feasible to assume Year on Year growth rates between 50 – 200% for a start-up, decreasing yearly (MHFC assume 100% growth in the first 5 years; established companies like Dewan & LIC grow at about 25% yoy typically)  Average Ticket Size is Rs. 4 Lakhs  Interest Rate: 14%; Gross Spread of 4%  Loan To Value: No more than 80%  Sanction and Disbursal: 12 month time lag between initial disbursement and commencement of principal repayment  Scheduled loan Tenure is 15 years  The average loan gets repaid in 8 years and there is no prepayment penalty 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Y1

20 60

Y2

Cumulative Amount of Loans Disbursed (in Rs Crores) 150

Y3

375

Y4

750

Y5

1,500

Y6

2,625

Y7

4,594

Y8

6,891

Y9 Y10

Observations

 The HFC will operate at a loss for the first few years, but will turn profitable by year 3  It is possible to model more aggressive or conservative growth scenarios based on the capital reserves available, high level strategic objectives (desired share of the market) of the promoters, supply of low income housing stock etc.

 Cumulative Portfolio Size is dependent on Average Ticket Size of loan, with bigger loans resulting in a larger book size Note: 1 Assumptions are based on interviews with Dewan Housing Finance Company, MAS Rural Housing and Finance, MHFC, and Fullerton Capital 12 Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND

Economic Potential

Customer Level Economics- Revenue and Costs at Branch Level

The average cost to acquire a customer is Rs. 8,000 and the cost to service their loan over their repayment period is Rs. 20,000, while the net income earned per customer is Rs. 88,000

Per Customer Cost Analysis

35,000 30,000 25,000 20,000 15,000 10,000

2,000 1,000 4,000 20,000 32,000 Assumptions

 Average Loan Size: Rs. 4 Lakhs  Interest Rate Charged: 14%  Loan Processing Fee: 1%  NPA: 1.0% 1  A 0.5% of loan value bonus is provided to the branch sales force as an incentive fee for each loan generated  These assumptions are typical for most HFCs (our data comes from Dewan, GRUH, HDFC and MHFC)

2,000

5,000

3,000

0 Legal & Technical clearance Sales Incentive Office Average Overheads Storage & Retrieval NPA Operating Overheads Total Cost to Serve

Per Customer Revenue Analysis 4,000 88,000

90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0

84,000 Observations

 It costs approximately Rs. 32,000 to serve each customer, i.e. cost to serve is about 8% of loan size,  The HFC would earn approximately Rs. 88,000 in net income from each customer  Net Profit Per Customer Over 8 years (not including

other costs) is approximately Rs. 56,000

Net Interest Income Processing Fee Total 13 Note: 1 DHFC and Gruh NPAs are less than 1% Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND

Economic Potential

Profitability over a 10 year time frame

The HFC will turn profitable after 3 years of operations, and it is anticipated that margins will grow sequentially in progressive years

Profitability over a 10 year time period Assumptions 1

300 250 200 150 100 50 0

-2.8

-1.2

0.8

5.6

16.0

27.3

52.6

101.9

180.3

276.9

 Average Loan Tenure: 8 years  Cost of debt: 10%  Debt Equity ratio:  Year 5 4: 1    Year 10 6: 1 Capex in Years 1 to 3- Rs 3 cr (towards software and hardware) Net Profit/Loss = Post Tax (Income – Expenses)  ROE = Net Profit/Loss / Average Equity  ROA = Net Profit/Loss / Average Assets -50 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10

22.0

23.0

25 20 15 10

Return On Assets Return On Equity

5 0

0.8

-3.0

-4.0

1.0

-5 -10 -15 Y1

-13.9

-13.0

Y2 Y3

6.0

2.2

Y4

10.0

2.9

Y5

13.0

2.5

Y6

17.0

2.6

Y7

19.0

2.9

Y8

3.2

3.3

Y9 Y10

Observations

 ROE of 23% in year 10 is very robust by the Indian financial industry standards  ROA of 3% in year 10 is comparable to HFC industry standards Note: 1 Based on conversations with HFC Industry Experts and existing HFCs 14 Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND

Low Income Housing as a Driver for Economic Growth: Wide Range of Benefits

Low income housing can provide huge benefits to families, communities and aid overall economic development of state

  

Provide alternative to Urban Slums

   

Benefits for families of Urban Poor

Housing is essential for the well-being of a family Enhanced security and health through organized housing with access to sanitation Access to better services (schools, healthcare etc.) which are typically available to higher income groups

~

40M people live in urban slums without basic facilities such as sanitation, water, schools, etc Renters disempowered. All power is w/ slum lords Slum lords “own” houses and benefit from Slum Rehabilitation Schemes Slums create high pressure on infrastructure within a city

Affordable Housing

 

Aiding Overall Economic Development

Construction of low income housing provides disproportionate job creation Creates significant economic value for state (taxes, ancillary economic activity, source of labor potentially leading to industry, etc   

Creation of Low-Risk Asset for Families

Long term wealth creation due to value of asset, “saving on rent” & collateral for loan A “security net” in crisis Low income houses typically built on land with low cost per sq. ft. Low likelihood of price depreciation, Hence downside risk is low 

Benefits to Communities

Neighborhoods with good quality housing have lower crime rates, stronger local economies and a better overall quality of life

Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND 15

THANK YOU !

16 Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND

Backup

17 Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND

Access to Housing Finance: A Market Overview

Although supply is beginning to flow majority of Banks and Housing Finance Companies are reluctant to serve customers in the informal sector because of the uncertainty of their risk profiles

Ticket Size Select HFCs (e.g., DEWAN HOUSING) Alternate means of income assessment for higher income customers such as supplier and customer checks, or MFI and chit fund savings history; guarantor typically required Large private Banks, HFCs

(e.g., HDFC, ICICI) 10 Lakhs 5 Lakhs

Low-end focused HFCs

(e.g., GRUH, MAS)

Limited geographic coverage & capacity Trying to move to higher ticket sizes to increase profitability Some low-income developer tie ups, but strictly formal sector; no ability/interest in informal customer risk assessment Willing to give loans only on documented income amount

2 Lakhs

Source: Monitor Research

Largely Un-served Some PSU schemes, but difficult to access loans due to bureaucracy; staff incentives geared towards disbursement targets

Informal

Paid / earns in cash No formal income documents No formal residence/identity documents

‘Semi-formal’

Salaried or Self Employed Significant proportion of undisclosed income Some residence/identity documents Difficulty of Assessing Risk

18

Formal

Salaried with pay slip Income Tax documents Residence Documents Identity documents Bank account

Copyright © 2009 Monitor Company Group, L.P. — Confidential — IND

Context

Housing Finance Market: Map of Existing Players

There are 45 registered HFCs in India, and these are split almost evenly between organizations that can accept deposits from the public and those that cannot

•

Vishwakriya Housing Finance

•

HUDCO

•

IDBI Home Finance

•

PNB Housing Finance

•

Deutsche Postbank Housing Finance

•

HBN Housing Finance

•

Indiabulls Housing Finance

•

GE Money Housing Finance

•

Maharishi Housing Development Finance Corporation

•

Swarna Pragati Housing Micro Finance Private Ltd.

MAS Rural Housing and Mortgage Finance

•

SRG Housing Finance

•

Akme Buildhome Private Ltd.

Satyaprakash Housing Finance India GRUH Finance Cent Bank Home Finance

•

GIC Housing Finance

•

HDFC

•

ICICI Home Finance

•

Dewan Housing Finance Corporation

•

LIC Housing Finance

•

AIG Home Finance India

•

Can Fin Homes

•

DHFL Vyasa Housing Finance

•

Manipal Housing Finance Syndicate

•

Sundaram BNP Paribas Home Finance

•

REPCO Home Finance

•

Ind Bank Housing

•

National Trust Housing Finance

•

Rose Valley Housing Development Finance Corporation

•

Sahara Housingfina Corporation Utkal Housing Finance Kerala Housing Finance Orange City Housing Finance

•

Inara Housing Finance

•

Janhavi Home Development and Finance Vastu Housing Finance Corporation

•

Haware’s Housing Development Finance Corporation

•

India Home Loans Limited

•

Mahindra Rural Housing Finance

• •

Micro Housing Finance Corporation Swagat Housing Finance Company

• •

Reliance Home Finance India Infoline Housing Finance

•

Tata Capital Housing Finance HFCs that canaccept Deposits HFCs that cannot accept Deposits

Source: NHB 19 Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND

Context

Barriers to entry for Housing Finance Companies

Housing Finance Companies are reluctant to serve customers in the informal sector because of the uncertainty of their risk profiles

Ticket Size Select HFCs (e.g., GRUH, Fullerton) Alternate means of income assessment for higher income customers such as supplier and customer checks, or MFI and chit fund savings history; guarantor typically required Large private Banks, HFCs

(e.g., HDFC, ICICI) 10 Lakhs 5 Lakhs

Low-end focused HFCs

(e.g., DHFC, MAS)

Limited geographic coverage & capacity Trying to move to higher ticket sizes to increase profitability Some low-income developer tie ups, but strictly formal sector; no ability/interest in informal customer risk assessment Willing to give loans only on documented income amount Largely Unserved Some PSU schemes, but difficult to access loans due to bureaucracy; staff incentives geared towards disbursement targets

Source: Monitor Research

Informal

Paid / earns in cash No formal income documents No formal residence/identity documents

‘Semi-formal’

Salaried or Self Employed Significant proportion of undisclosed income Some residence/identity documents

Formal

Salaried with pay slip Income Tax documents Residence Documents Identity documents Bank account

Difficulty of Assessing Risk

20 Copyright © 2008 Monitor Company Group, L.P. — Confidential — IND

Low Income Segments as Target Market Largely-Untested Risk Profile, different from Sub-prime in the USA

Confidential

Sub-prime Experience in USA

 Very high LTV; creative structures developed to reduce EMIs  Loans extended without due consideration to ability to pay (basis employment history) – financing provided to those with questionable employment record  Cost of asset disproportionately high compared to replacement cost; this is attributed to the real estate asset bubble in the US – hence high risk of payment default

Low-Income Housing in India

 75-80% LTV – significant individual contribution required; EMIs tend to be 35% of Monthly Income  Target customers have regular employment, albeit with low income – with an unproven credit record which needs to be tested  In the low income segment, relatively low cost of land (esp. in peri-urban areas) leads to high correlation between cost of asset and replacement cost; and hence

lower risk of asset bubbles



Outcome: Sub-prime Defaults and Foreclosures



Outcome: Untested, relatively low-risk segment with significant business potential

SFS-HMM-VBHL 2nd Review Blank Loop_v8-081022-SA 21 Copyright © 2008 Monitor Company Group, L.P. — Confidential

Confidential

Key Challenges and Critical Success Factors

Understanding Key Challenges

Understanding real versus perceived credit risk and managing costs to serve are the key challenges for HFCs serving the informal sector

Understanding the risk profile of the informal sector Cash micropayments

 Unconventional methods are required to measure the credit risk associated with low income informal groups, in the absence of formal documentation  Alternate methods of income verification income such as understanding the customer’s savings history (chit funds, MFIs), business (access to credit from suppliers, line of credit to customers, daily cash flows etc.) are required  Collecting a large number of small payments that originate from the customer as cash is difficult and expensive  Most HFCs use a post-dated cheque or ECS system, but this requires that the customer have a pre-existing bank account  If a cost-effective system to address cash micropayments is implemented, it is anticipated that default rates will drop significantly – default rates among Dewan Housing Finance Limited’s cash paying customers are extremely low (0.13%, as against an average industry NPA of 1.5%)

Managing Construction Risk (Developer Tie-Ups)

 As low cost housing finance is mostly driven by access to supply of appropriate homes, performing adequate due diligence on developer partners is paramount  Managing delays in construction by structuring loans to be delivered post construction in staged phases of the project – this will incentivize the developer and avoid lengthened interest payments from the customers because of project delays  Lack of adequate access to wholesale construction finance from commercial sources Source: Monitor Analysis SFS-HMM-VBHL 2nd Review Blank Loop_v8-081022-SA 22 Copyright © 2008 Monitor Company Group, L.P. — Confidential

Confidential

Key Challenges and Critical Success Factors

Enabling Regulatory Environment and Government Policy

There are a variety of potential government and interventions that could help catalyze the low income housing finance sector

Govt and NHB interventions

 Access to sources of long term, low cost funding (ideally below market rates) to enable HFCs to keep consumer interest rates low  Expediting NHB timelines for granting HFCs approvals and improved transparency into the process would enable rapid and efficient market entry for new players.

 Creating a guarantee fund that could take the first X% of losses against lending to low income groups would encourage new players to enter the market – This would allow these players to build a better understanding of risk in the segment and in turn appropriately price risk into their mortgage products.

Process and Technology Innovations

 Allow daily cash collections of EMIs through network of collection agents/MFIs or at the branch  Introduce a seasonal loan products that enables customers to tune their repayment cycle to their seasonal income cycles  Linkages between customers’ savings accounts and repayment schedules to enable direct deposits of EMIs etc  Mobile banking facilities to enable prompt repayments from customers lacking bank accounts

Leveraging the MFI network

 Use MFIs extensive knowledge of the target customer base to select customers with strong repayment history and lower perceived risk  Employ MFIs extensive staff of Field Officers for loan collection and disbursals of loans  Encourage the government to make it easier for MFIs to set up HFC divisions Source: Monitor Analysis SFS-HMM-VBHL 2nd Review Blank Loop_v8-081022-SA 23 Copyright © 2008 Monitor Company Group, L.P. — Confidential

Confidential

Establishing a Housing Finance Company in India

Monitor Inclusive Markets’ Role

Monitor is well positioned to help incubate new Housing Finance Companies focusing on the low income sector, through its knowledge of the low income space in India as well as its deep networks

Disseminate Concept & Help New Players Adopt the Business Model

 Introduce the concept of housing finance and disseminate information on the commercially viable business opportunity to provide housing finance to low income customers to broad groups of stakeholders  Actively assist new players interested in entering the HFC space with their market entry strategies and business plans

Facilitate Access to Capital

 Assist in preparation of Information Memorandums for HFCs looking to raise funds  Connect HFCs to Private Equity investors looking to invest in the low income housing finance ecosystem  Actively assist in the fundraising process through broader introductions and brokerage with sources of capital such as multilateral institutions, foundations, impact investing networks etc.

Link HFC to key players in the Low Income Housing Ecosystem through Monitor’s networks

 Assist entrepreneurs through our knowledge of the process of setting up an HFC and introductions to experts and prior successful applicants  Connect the HFC to lawyers and technical experts with deep expertise in housing finance  Introduce the HFC to Monitor’s vast networks of developer partners, and facilitate tie-ups between the HFC and specific low income housing projects Copyright © 2008 Monitor Company Group, L.P. — Confidential SFS-HMM-VBHL 2nd Review Blank Loop_v8-081022-SA 24