2009 Low Income Housing in India AMSTERDAM BEIJING

2009 Low Income Housing in India AMSTERDAM BEIJING

2009 Low Income Housing in India AMSTERDAM BEIJING CAMBRIDGE CHICAGO DELHI DUBAI FRANKFURT HONG KONG Financing Low Income Housing: Magnitude and Economics JOHANNESBURG LONDON LOS ANGELES MADRID MANILA MOSCOW MUMBAI MUNICH Based on a Project for NHB with support from World Bank, IFC and MSDF NEW YORK PALO ALTO PARIS October 29, 2009 SAN FRANCISCO SO PAULO SEOUL SHANGHAI SINGAPORE STOCKHOLM TOKYO TORONTO ZURICH Copyright 2009 by Monitor Company Group, L.P. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means electronic, mechanical, photocopying, recording, or otherwise without the permission of Monitor Company Group, L.P. This document provides an outline of a presentation and is incomplete without the accompanying oral commentary and discussion. Monitor Group: An Introduction Founded by renowned academics, the Monitor Group has grown rapidly to become a leading global management consulting firm Michael Porter, Harvard Business School Director and Co-Founder of the Monitor Group Founded by Michael Porter and other HBS faculty in 1983 Renowned for focus on strategy and cutting-edge ideas that help clients grow We believe that Ideas can create impact With over 25 offices across the globe, we go the last mile Corporates Growth Strategies Leadership & Innovation Private Equity Funds Governments City Strategies Cluster Development Country Competitiveness 2 Non Profits Social Venture Funds Impact Investing Education Ecosystem Copyright 2008 Monitor Company Group, L.P. Confidential IND Financing Low Income Housing: Market Potential 1. Context: The Business Opportunity and Social Need 2. Economic Potential 3 Copyright 2008 Monitor Company Group, L.P. Confidential IND

Context Low Income Housing: The Landscape Urban India has a vibrant housing market and housing finance has grown at a CAGR of over 35% for the past 13 years1. However, the supply of housing stock is concentrated on the upper income groups the low income segments are largely un-served Typical Typical Low-end Low-end housing housing available available in in urban urban markets markets Urban India Expenditure Pyramid2 Income MHE: >Rs 9,625 pm MHE: Rs 4,575 Rs 9,625 pm MHE: Rs 2,500 Rs 4,575 pm Area of city: Within an hour from the city centre Close to primary, secondary schools, healthcare centre and market place Well connected to city by bus/train linkages 16% (10MM) 37% (~23MM) 33% (~21MM) Rs. 11,000 US $ 220 Typical complex would comprise 3 to 5 buildings with 4 to 8 flats/ floor and 4 floors Regular water and electricity No lifts and single set of staircases Complex would be fenced by a compound wall with shared open spaces including garden and access to play area for kids Each flat has a super built up area of 450-550 sq.ft. Rs. 5,000 US $ 100 1 BHK with an attached toilet and bathroom Well painted walls and good interiors Rs. 2,500 MHE:

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 SlumDwellers 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 Englishmedium school Rent

Has seen significant & frequent increases in rent, has moved house 5 times in 12 years Both Both share share aa dream dreamA Ahouse house of of their theirown. own. Can Can afford afford aa 250 250 to to350 350 sq sq ftfthouse, house, willing willing to to make make 20% 20% down down payment payment&& pay pay 35% 35%of ofmonthly monthlyincome income as asEMIs EMIsto to realize realize their theirdream dream Source: Primary Research (n=2000), Monitor Analysis 6 Copyright 2008 Monitor Company Group, L.P. Confidential IND 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 MHI1 (Rs) 1% (0.7MM) >80000 4000080000 5% (3.4MM) 3000040000 4% (2.7MM) Supply of Housing Finance Price of unit2 > 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 Potential size of mortgage market ~ Rs 400,000 Cr Various mortgage finance options available for segment

Price of unit: Rs 1025 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 Price of House: Rs 310 Lakhs Potential demand from ~ 22 Mn HHs with estimated Market Size ~Rs 1,100,000 Cr 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 5% (3.4MM) 2000030000 1000020000 Offering & Supply of Housing 22% (15.0MM) 500010000 31% (21.1MM) <5000 33% (22.4MM) 3 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

Ahmedabad: Vatva Taral Bakeri Phase 1: 800 units Price: Rs 3.3 Lakh 5.6 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 Bangalore: Atibele Janadhar 11 acres: 1500 units 1BHK and 2 BHK; Rs 4 Lakh and 6 Lakh Source: Monitor Research Bangalore: Value Budget Housing Development Corporation Rs 3-9 Lakh townships on minimum 10 acre plots; 1 Million intended flats 8 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 Copyright 2008 Monitor Company Group, L.P. Confidential IND Monitors activities for the past two years Facilitating Low Income Housing: Doing what it takes Encouraging Encouraging Developers Developers Dissemination Dissemination Conveying Conveying the theopportunity opportunity Press Press including includingReal Real Estate Estatetrade trade journals journals (over (over20) 20) Conferences Conferencesand andgroup group sessions sessions(over (over 30) 30) One One on on one onemeetings meetingswith withbroad broadrange range of ofstakeholders stakeholders (over (over400) 400) Arranging Arrangingcustomer customerfinancing financing

Obtaining Obtaining customers customers Sharing Sharingbest bestpractices practices(architectural (architectural designs, designs,site sitelayouts, layouts,etc.) etc.) Building Building the the Ecosystem Ecosystem Existing Existingand and new newplayers playersfor formortgage mortgage finance finance (including (including incubating incubating aa housing housing finance financecompany) company) PE PEand andVC VCfunds funds (incubated (incubated aaUSD USD100 100Million Million housing housingecosystem ecosystemfund) fund) Research Research on onoptimal optimal architectural architecturaldesigns, designs,low low cost costconstruction constructiontechnology, technology,sustainability sustainabilityetc. etc. 9 Copyright 2008 Monitor Company Group, L.P. Confidential IND 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 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 Customer Profile and Focus 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 Primary Product: Loan for home purchase Product Offerings and Pricing Structure 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 financiers 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 customers 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 Assumptions11 Portfolio Growth Projections over 10 years 250,000 Cumulative Number of Loans Disbursed Since Since the the HFC HFC market market is is extremely extremely underpenetrated underpenetrated itit is is feasible feasible to to assume assume Year Year on on Year Year growth growth rates rates between between 50 50 200% 200% for for aa start-up, start-up, decreasing decreasing yearly yearly (MHFC (MHFC assume assume 100% 100% growth growth in in the

the first first 55 years; years; established established companies companies like like Dewan Dewan & & LIC LIC grow grow at at about about 25% 25% yoy yoy typically) typically) Average Average Ticket Ticket Size Size is is Rs. Rs. 44 Lakhs Lakhs Interest Interest Rate: Rate: 14%; 14%; Gross Gross Spread Spread of of 4% 4% Loan Loan To To Value: Value: No No more more than than 80% 80% Sanction Sanction and and Disbursal: Disbursal: 12 12 month month time time lag lag between between initial initial disbursement disbursement and and commencement commencement of of principal principal repayment repayment Scheduled Scheduled loan loan Tenure Tenure is is 15 15 years years The The average average loan loan gets gets repaid repaid in in 88 years

years and and there there is is no no prepayment prepayment penalty penalty 258,398 200,000 172,266 150,000 114,844 100,000 65,625 37,500 50,000 500 1,500 0 Y1 Y2 3,750 9,375 Y3 Y4 18,750 Y5 Y6 Y7 Y8 Y9 11,000 Y10 10,336 10,000 Cumulative Amount of Loans Disbursed (in Rs Crores) 9,000 8,000 (Rs. Cores) Cumulative Value of Loans Disbursed Cumulative Growth in Loans 300,000 Observations 6,891 7,000 6,000 4,594 5,000 The The HFC HFC will will operate operate at at aa loss loss for for the

the first first few few years, years, but but will will turn turn profitable profitable by by year year 33 ItIt is is possible possible to to model model more more aggressive aggressive or or conservative conservative growth growth scenarios scenarios based based on on the the capital capital reserves reserves available, available, high high level level strategic strategic objectives objectives (desired (desired share share of of the the market) market) of of the the promoters, promoters, supply supply of of low low income income housing housing stock stock etc. etc. Cumulative Cumulative Portfolio Portfolio Size Size is is dependent dependent on on Average Average Ticket Ticket Size Size of of loan, loan, with with bigger bigger loans loans resulting resulting in in aa larger larger book book size size 4,000 2,625 3,000 1,500 2,000 1,000 0 20 Y1

60 150 375 Y2 Y3 Y4 750 Y5 Y6 Y7 Y8 Y9 Y10 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 Cost to Serve Per Customer (Rs.) 35,000 Assumptions 20,000 32,000 30,000 25,000 20,000 15,000 4,000 10,000 5,000 3,000 2,000 2,000 1,000 Average Average Loan Loan Size: Size: Rs. Rs. 44 Lakhs Lakhs Interest Interest Rate Rate Charged: Charged: 14% 14% Loan Loan Processing Processing Fee: Fee: 1%

1% NPA: NPA: 1.0% 1.0%11 A A 0.5% 0.5% of of loan loan value value bonus bonus is is provided provided to to the the branch branch sales sales force force as as an an incentive incentive fee fee for for each each loan loan generated generated These These assumptions assumptions are are typical typical for for most most HFCs HFCs (our (our data data comes comes from from Dewan, Dewan, GRUH, GRUH, HDFC HDFC and and MHFC) MHFC) 0 Legal & Sales Office Documentation,Average Operating Total Cost Technical Incentive Overheads Storage & NPA Overheads to Serve clearance Retrieval Income Earned Per Customer (Rs.) Per Customer Revenue Analysis 90,000 84,000 4,000 88,000 80,000 70,000 Observations 60,000 50,000 ItIt costs costs approximately approximately Rs. Rs. 32,000 32,000 to to serve serve each each customer, customer, i.e. i.e. cost cost to to serve serve is is about about 8% 8% of of loan

loan size, size, 40,000 30,000 The The HFC HFC would would earn earn approximately approximately Rs. Rs. 88,000 88,000 in in net net income income from from each each customer customer Net Net Profit Profit Per Per Customer Customer Over Over 88 years years (not (not including including other other costs) costs) is is approximately approximately Rs. Rs. 56,000 56,000 20,000 10,000 0 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 Net Profit/(Loss) (Rs. crores) Profitability over a 10 year time period Assumptions11 300 276.9 250 180.3 200 Average Average Loan Loan Tenure: Tenure: 88 years years Cost of debt: 10% Cost of debt: 10%

Debt Debt Equity Equity ratio: ratio: Year Year 55- 150 101.9 100 50 -2.8 0 -1.2 0.8 5.6 16.0 27.3 52.6 4: 4: 11 6: 6: 11 Year Year 1010Capex Capex in in Years Years 11 to to 33- Rs Rs 33 cr cr (towards (towards software software and and hardware) hardware) Net Net Profit/Loss Profit/Loss == Post Post Tax Tax (Income (Income Expenses) Expenses) ROE ROE == Net Net Profit/Loss Profit/Loss // Average Average Equity Equity ROA ROA == Net Net Profit/Loss Profit/Loss // Average Average Assets Assets -50 Y1 Y2 Y3 Y4 Y5

Y6 Y7 Y8 25 22.0 Return On Assets Percentage Return 20 Y10 23.0 19.0 Observations 13.0 10.0 10 6.0 5 0.8 0 -3.0 -4.0 -5 -15 17.0 Return On Equity 15 -10 Y9 2.2 2.9 2.5 2.6 2.9 3.2 Y4 Y5 Y6 Y7 Y8 Y9 3.3 ROE ROE of of 23% 23% in in year year 10 10 is is very very robust robust by by the the Indian Indian financial financial industry

industry standards standards ROA ROA of of 3% 3% in in year year 10 10 is is comparable comparable to to HFC HFC industry industry standards standards 1.0 -13.9 -13.0 Y1 Y2 Y3 Note: 1 Based on conversations with HFC Industry Experts and existing HFCs 14 Y10 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 ~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 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 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 Affordable Housing Creation of Low-Risk Asset for Families Benefits to Communities 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 15 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 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 10 Lakhs Low-end focused HFCs (e.g., GRUH, MAS) Limited geographic coverage & capacity Trying to move to higher ticket sizes to 5 Lakhs increase profitability Largely Un-served 2 Lakhs 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 Source: Monitor Research 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 18 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 Rose Valley Housing Development Finance Corporation Sahara Housingfina Corporation GRUH Finance Cent Bank Home Finance Utkal Housing Finance GIC Housing Finance HDFC ICICI Home Finance Dewan Housing Finance Corporation LIC Housing Finance AIG Home Finance India Orange City Housing Finance Inara Housing Finance Janhavi Home Development and Finance Vastu Housing Finance Corporation Can Fin Homes DHFL Vyasa Housing Finance Manipal Housing Finance Syndicate Hawares 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 Sundaram BNP Paribas Home Finance REPCO Home Finance Ind Bank Housing National Trust Housing Finance Kerala 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 10 Lakhs Low-end focused HFCs (e.g., DHFC, MAS) Limited geographic coverage & capacity 5 Lakhs Trying to move to higher ticket sizes to increase profitability Largely Unserved 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 Formal Salaried with pay slip Income Tax documents Residence Documents Identity documents Bank account Difficulty of Assessing Risk Source: Monitor Research 20 Copyright 2008 Monitor Company Group, L.P. Confidential IND Confidential Low Income Segments as Target Market Largely-Untested Risk Profile, different from Sub-prime in the USA Sub-prime Experience in USA Low-Income Housing in India Very Veryhigh highLTV; LTV;creative creativestructures structures 75-80% 75-80%LTV LTVsignificant significantindividual individual developed developedto toreduce reduceEMIs EMIs Loans Loansextended extendedwithout withoutdue due consideration considerationto toability abilityto topay pay (basis (basis employment employmenthistory) history)financing financing provided providedto tothose thosewith withquestionable questionable employment employmentrecord record Cost Costof ofasset assetdisproportionately disproportionatelyhigh high compared comparedto toreplacement replacementcost; cost;this thisisis attributed attributedto to the thereal real estate estate asset assetbubble bubble

in inthe theUS US hence hencehigh highrisk riskof ofpayment payment default default contribution contributionrequired; required;EMIs EMIs tend tendto to be be 35% 35% of ofMonthly Monthly Income Income Target Targetcustomers customershave haveregular regular employment, employment,albeit albeitwith withlow lowincome incomewith with an anunproven unprovencredit creditrecord recordwhich whichneeds needs to to be betested tested In In the thelow lowincome incomesegment, segment,relatively relatively low low cost costof ofland land (esp. (esp.in inperi-urban peri-urbanareas) areas) leads leads to tohigh highcorrelation correlationbetween betweencost costof of asset assetand andreplacement replacementcost; cost;and andhence hence lower lowerrisk risk of ofasset assetbubbles bubbles Outcome: Sub-prime Defaults and Foreclosures SFS-HMM-VBHL 2nd Review Blank Loop_v8-081022-SA 21

Outcome: Untested, relatively low-risk segment with significant business potential 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 Understanding the the risk risk profile profile of of the the informal informal sector sector Cash Cash micropayments micropayments Managing Managing Construction Construction Risk Risk (Developer Tie-Ups) (Developer Tie-Ups) Source: Monitor Analysis SFS-HMM-VBHL 2nd Review Blank Loop_v8-081022-SA 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 customers 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 Limiteds cash paying customers are extremely low (0.13%, as against an average industry NPA of 1.5%) 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 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 Govt and and NHB NHB interventions 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 Process and and Technology Technology Innovations Innovations Leveraging Leveraging the the MFI MFI network network Source: Monitor Analysis SFS-HMM-VBHL 2nd Review Blank Loop_v8-081022-SA 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 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 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 Disseminate Concept Concept & & Help Help New New Players Players Adopt

Adopt the the Business Business Model Model Facilitate Facilitate Access Access to to Capital Capital Link Link HFC HFC to to key key players players in in the the Low Low Income Housing Income Housing Ecosystem Ecosystem through through Monitors Monitors networks networks SFS-HMM-VBHL 2nd Review Blank Loop_v8-081022-SA 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 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. 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 Monitors vast networks of developer partners, and facilitate tie-ups between the HFC and specific low income housing projects 24 Copyright 2008 Monitor Company Group, L.P. Confidential

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