Tech-enabled home loans for India's emerging consumers

60,000 0

Households served

$ 650 0 m

Loans disbursed

100 0 +

Branches Nationally

Access to quality housing is a critical step in improving quality of life and facilitating the creation of family wealth for low-income consumers in India.

Shubham is a specialist affordable mortgage lender that operates in 9 states and has 100 branches across India. The company offers products with a strong market fit which is profitable and scalable. Together, LeapFrog and Shubham are working together to enhance Shubham’s footprint, data science capabilities and customer experience to grow the company’s customer base by more than 500,000 people over the term of investment.

Housing is a critical issue for the 160 million Indians who the United Nations estimates live in slums1 .

Access to quality housing is a critical step in improving sanitation, delivering access to clean water, improving privacy and dignity, and facilitating the creation of family wealth. One key to solving this problem is access to affordable home loans. Access to affordable housing finance from a formal financial institution has been shown to catalyse a 10x increase in home ownership, double the rates of access to toilets and clean water, and deliver a 91% improvement in overall quality of life for low-income Indian families2 .

Despite this, lenders have traditionally faced a dilemma when attempting to issue home loans to low-income groups in India and elsewhere. These workers are often paid in cash as part of the informal economy, or are self- employed, and cannot provide the payslips or tax returns to verify their incomes and secure finance from formal finance institutions.

Historically, these customers have relied on informal lenders or credit cooperatives to access their required capital, who charge rates of between 3-10% a month depending on the collateral their borrowers provide, far greater than the annual rate of 15-18% on personal loans from commercial banks3 . This has further flow on effects for the country’s economy and persistent high rates of inflation given the size of the market outside of the reach of the formal Reserve Bank of India rates4 .

A new crop of digital loan sharks has also emerged in recent years, charging interest rates as high as 500% and employing heavy-handed collection tactics for collection5 . Demand for affordable home loans is predicted to continue its current upward trend as rapid urbanisation continues, driven by rural migration to the city in search of economic opportunity. By 2050, India is projected to add 404 million urban dwellers6 , with the burden of the significant housing shortfall disproportionately falling on those families earning less than 16,000 rupees ($248) a month7 .

Impact of Affordable Housing Shubham
Source: The socio-economic effects of the working poor moving to permanent dwellings, RAND, 2014.

Shubham Housing Development Finance Company (Shubham) is a specialist mortgage lender committed to making it easier for India’s emerging consumers to buy their first home. The company operates in nine states across India, leveraging technology and its vast network of trained sales agents to provide access to finance for previously underserved consumers.

Shubham has tackled this issue with a range of technologies, processes, and efficiencies, in particular drawing on data collection, predictive analytics, and machine learning to help make sense of applicants who may have no formal documentation to prove their income. This strategy of digitally enabled underwriting involves building rich data lakes from the profiles of thousands of low-income customers, and from this data constructing statistical models that determine reliable benchmarks to assess their income.

For instance, Shubham’s modelling has shown that a shopkeeper selling footwear in Delhi, who is paid in cash and has no formal proof of income, is likely to earn a higher salary than a schoolteacher. Traditionally the schoolteacher has been able to secure a loan, while the shopkeeper has been excluded from home finance. Shubham’s algorithmic benchmarking of professions and average incomes allows for sensible lending rates to shopkeepers and similar undocumented applicants and is supplemented by a range of other checks.

For instance, even informal small businesses have bookkeeping records, receipts, and inventory that are used to validate income. Neighbours and employers are interviewed to help supplement this picture. A standard trading margin for different types of goods like food, textiles, or mechanical parts, is applied to check if a store owner is likely to turn the profit they claim in their application.

Through these methods, Shubham can assign a credit score to an undocumented or thinly documented worker and allow them access to home finance for the first time. Customers are motivated to access these home loans for a range of reasons. Insights from Shubham’s customers include stories like “We faced multiple problems with landlords and had to move house every 1-2 years, so we wanted a home of our own,” and “We wanted a safe place for our family after our second child was born”.

Shubham has been able to build a business around serving these low-income consumers, who now comprise 80% of its customers. It is also able to collect home loan repayments in cash or through WhatsApp, further helping those in the informal economy to service their loan. Shubham now has a loan book of INR 20Bn (US$270m), and 30,000 customers.

Characteristics of Shubham's target <~$US30k loan segment Characteristics of Shubham's target <~$US30k loan segment
Source: Shubham, 2022. *LTV: Average Loan to Value (of property).
Characteristics of Shubham's target <~$US30k loan segment

Shubham has taken on a major challenge in delivering housing finance to low-income consumers, and LeapFrog is committed to accelerate its growth. LeapFrog will help to scale Shubham’s platform, in particular building out data science capabilities to make best use of the over 120 data points collected from each Shubham loan applicant.

Through continual learning, analysis and modelling, this data can deliver more accurate and efficient credit checks on workers with low documentation and improve overall accessibility and affordability. A greater focus on data will also assist Shubham to build a better picture of their impact, with tracking to be implemented to show how new housing improves access to sanitation, clean water, reliable electricity and greater living area per occupant.

LeapFrog’s customer experience (CX) team will work with Shubham to improve customer journeys, with a focus on attracting low-income customers and solving their specific challenges. In previous portfolio companies these CX efforts have included creating products for semi-literate and digitally excluded groups and expanding branches and sales teams in low-income areas.

LeapFrog plans to support and enhance Shubham’s responsible lending practices, which ensure that loans do not leave customers overly indebted, and that customer complaints are tracked and resolved quickly. LeapFrog’s Talent Accelerator will work to improve employee retention, with a focus on incentivising top performing agents while LeapFrog’s capital will support Shubham’s expansion into more cities, and support greater participation and home ownership among women applicants, increasing the reach and diversity of customers served.

Indian government policy has also provided the launchpad for new, innovative home loan lenders like Shubham by offering home loan subsidies for low-income groups earning US$13,000 or less each year. Consequently, these borrowers can access an effective interest rate through Shubham that is closer to rates offered to wealthier customers.

Further, the company is one of a handful of alternative lenders building platforms on a new government-backed national biometric identity program called the IndiaStack. The program makes it easier to validate identity, make payments, and sign documents using devices like mobile phones, improving the efficiency of banking, insurance, and other financial products.

India's Housing Shortfall by 2022 India's Housing Shortfall by 2022
India's Housing Shortfall by 2022