Housing Finance for the Low-income Population in India: A Market Demand Assessment

Transcription

1 Housing Finance for the Low-income Population in India: A Market Demand Assessment Prepared by The Development Innovations Group December 2008

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3 TABLE OF CONTENTS Executive Summary 5 A. Introduction 7 B. Background 7 C. Overall Results of the Market Assessment 9 C.1. Socio-Economic Profile of the Sample 9 C.2. Household Income 10 C.3. Housing Quality 11 C.4. Enterprise Characteristics 11 C.5. Availability of Informal Financing 12 C.6. Effective Demand for Formal Financial Services 13 C.7. Potential Demand for Individual Loans 14 C.8. Potential Demand for Housing Loans 15 D. Variations by Repayment Capacity 17 E. Variations by Type of Employment 19 E.1. Socio-Economic 19 E.2. Housing Quality 19 E.3. Use of Financial Services 20 F. Regional Variations 21 F.1. Socio-Economic 21 F.2. Housing Quality 22 F.3. Use of Alternative Financial Services 22 G. Gender Variations 25 H. Market Opportunities 27

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5 TABLE OF FIGURES Figure C1: Type of Employment 9 Figure C2: Sectors of Employment 9 Figure C3: Educational Level 10 Figure C4: Average Household Income and Repayment Capacity 11 Figure C5: Sources of Informal Loans 13 Figure C6: Types of Formal Loans 14 Figure D1: Figure D2: Figure E1: Variations of Household Income and Repayment Capacity 17 Use of Financial Services by Repayment Capacity 18 Household Income and Repayment Capacity by Employment Type 19 Figure E2: Use of Financial Services by Employment Type 20 Figure F1: Household Income and Repayment Capacity by Region 21 Figure F2: Use of Financial Services by Region 23 Figure H1: Use of Financial Services in India 28

6 Currency Equivalent Exchange rates for the Indian Rupee (Rs): 1 U.S. Dollar (US$) = 42 Rs (Average rate for April 2007) Acronyms/ Definitions DIG Chit Funds/Beces GDP INRs RoSCAs Development Innovations Group Chit Funds are savings schemes, whereby a certain number of people join together and contribute money on a regular basis, which is then paid out to one member of the group at a time. The contribution and pay out are continued in turns until the cycle is completed and the total individual contribution equals the amount received by each member of the group. Gross Domestic Product Indian Rupees Rotating Savings and Credit Associations

7 Executive Summary This market assessment report presents the results of the demand survey conducted by Development Innovations Group (DIG) in India in the spring of The market demand assessment helps to construct a financial profile of low-income households in the country, and to provide greater insight into both the effective and potential demand for financial services among the low-income population in general, particularly with regards to housing finance. By looking at a range of economic actors (including microentrepreneurs, low-income employees, laborers and non-contract employees) working in the three major sectors of economic activities (services, trade, and manufacturing), and across a variety of regions, the survey is able to provide results that reflect a representative sample of low-income earners in India. The typical respondent is a 35 year-old head of household with a family of four living in a rented or owned home. The respondent s primary source of income averages Rs 6,174, reaching Rs 8,807 1 when considering all other sources of income. The average total household expenses amount to Rs 6,291 2, leaving the household with Rs 2,516 cash, an average calculated repayment capacity of Rs 2,202, and an effective monthly repayment capacity of Rs 1, In order to reduce the risk of delinquency among potential borrowers when designing microloans to this segment of the population, monthly installments should not exceed the monthly effective repayment capacity. Results of the study indicate that most microentrepreneurs (half of all respondents) are owners of their businesses and that the majority run their businesses from stores without any additional paid labor. Microenterprises tend to be sole proprietorships, mainly buying and selling goods in cash, with a few using supplier-credit or extending credit facilities to their regular clients. The biggest challenges reported by microentrepreneurs are weak demand and domestic competition. With respect to the use of financial services, the vast majority of respondents meet their demand for external finance through the extensive use of informal loans. Almost all of the respondents used informal loans over the past year, with an average loan amount of Rs 9,345 4, and an average repayment period of eight months. Loans were mostly used for personal purposes. In addition, there was significant participation in informal savings groups, with approximately one-quarter of the sample reporting participation in RoSCAs with an average monthly share contribution of Rs 768. In stark contrast, very few respondents reported borrowing from the formal sector but the few who accessed formal credit reported using the loans for home improvements. The survey revealed that the vast majority of low-income earners had never requested a formal loan mainly due to their lack of financial documents and lengthy procedures. Interestingly, and contrary to their opting out of the formal loan market, a high percentage of these economic agents hold deposits in formal institutions. 1 $210 average monthly household income. 2 $150 average monthly household expenses. 3 $44 effective monthly repayment capacity. 4 $220 average value of informal loan used in the past year. 5

8 While effective demand for formal financial sector loans has been limited, there was considerable interest among the sample in future individual loans, particularly for business and housing loans. Many home-owners indicated an interest in undertaking home improvements in the future, while few respondents were interested in moving or constructing a new house. The average housing loan demanded was Rs 127,113 with a repayment period of 76 months, to be used primarily for home improvements, mortgages, and construction material. The average monthly installment of Rs 1,944 is in line with the estimated repayment capacity of the respondents. The study also examined variations in the use of and demand for financial services. These variations were particularly evident when exploring trends in the different types of employment and geographic regions, and most notably so when considering the different repayment capacities. Roughly two-thirds of the sample demonstrated a repayment capacity of less than Rs 2,000, with entrepreneurs comprising the bulk of those with higher repayment capacities of more than Rs 2,000. Mumbai, New Delhi, Bangalore, and Chennai, had the highest repayment rates. While there was not a consistent correlation between household income levels and home ownership across regions, microentrepreneurs did constitute the largest group of home owners, whereas wage laborers and employees are more likely to rent. Again, Mumbai with its high concentration of microentrepreneurs also has the highest concentration of homeowners, while Bangalore has the lowest, in spite of relatively high-income levels. Finally, regarding formal loans, respondents from Jaipur, the city least likely to be banked given that it has the lowest household incomes, reported the highest formal loan amounts. In addition to assessing the potential demand for financial services among low-income earners, this study begins to identify opportunities for new financial products that can be developed to meet the specific needs of this market segment. This is particularly the case when examining the housing sector niche, which offers ample room for expansion and growth. This study sheds light on the nature of housing loan demand, and offers specific data regarding the size, terms, conditions and costs of individual loans that respondents would be willing to take to meet their housing needs. Financial service providers who are willing to better understand the specific characteristics of low-income clients and the nature of their economic activities will be extremely successful in penetrating this new market. In particular, financial service providers should look at the effective monthly repayment capacity as a key indicator of the loan amounts and monthly repayment rates that on average could be afforded by the group.

9 A. Introduction The Development Innovations Group (DIG), under a grant from the Bill and Melinda Gates Foundation, is undertaking an action research program in the area of housing finance for the poor in countries around the world including: India, Indonesia, Mexico, Morocco, Pakistan, Angola, and South Africa. The program aims to provide donors, policy makers, and development finance practitioners with a better understanding of the housing markets in these countries to help shape future investments and efforts toward the promotion of housing finance in the developing world. As part of its applied research strategy, DIG is conducting assessments of low-income communities in select countries, with a particular focus on housing finance. These market assessments look at the variety of formal and informal financial services currently available, how they are effectively used, and the potential demand for additional products and services given existing and desired housing conditions. This market assessment report presents the results of the demand survey conducted in India in the spring of The survey covered a number of areas of enquiry ranging from an assessment of household income and expenditures, to current access to financial services, and potential demand for housing-specific financial products. The survey sample was constructed to take into account differences in employment categories, geography, and gender variables representative of India s low-income earners, which are viewed as significant determinants of variations within the population. Thus, the results can be extrapolated to reflect on the use of financial services by low-income earners across India and their demand for financial services, in particular housing finance. B. Background India is home to 1.1 billion people, roughly one-sixth of the world s population, and has the world s twelfth largest economy. It boasts a diverse economy made up of traditional village farming, modern agriculture, and handicrafts as well as a wide range of modern industries and services. The service sector is the main source of economic growth in the country, accounting for more than half of India s output with less than one-third of its labor force. Approximately three-fifths of the work force is employed in agriculture 5. India s economy has enjoyed an average growth rate of more than seven percent over the past decade, reducing poverty by approximately 10 percentage points. India achieved 8.5 percent GDP growth in 2006, significantly expanding manufacturing and raising GDP per capita to USD 2,700. Economic expansion has helped India s capital, New Delhi, continue to make progress in reducing its federal fiscal deficit, which stands at 10 percent of gross domestic product (GDP) - one of the highest among large countries. 5 CIA World Factbook: (Jan. 2008). 7

10 However, strong growth - more than eight percent in each of the last three years - combined with easy consumer credit and a real estate boom, fueled inflation concerns in 2006 and The huge and growing population remains the fundamental social, economic, and environmental challenge faced by India today 6. India is intensifying its economic and social policy reforms in an attempt to decrease poverty and increase social equity. The India Planning Commission has estimated that 27.5% of the population was living below the poverty line in In spite of the government s commitment to halve poverty rates by the year 2020 and to focus more heavily on development and economic reform 8, economic development in India remains uneven and varies widely by region and social factors. Inadequate infrastructure and public sector ownership of most core infrastructure continue to be major constraints to more rapid economic growth and poverty reduction. 6 ibid. 7 Government of India: 8 USAID:

11 C. Overall Results of the Market Assessment C.1. Socio-Economic Profile of the Sample The market demand study surveyed a sample of 6,575 respondents comprised predominately of micro-entrepreneurs and low-income workers. The sample was randomly selected across six major Indian metropolitan cities: Mumbai (26%), New Delhi (20%), Chennai (17%), Bangalore (15%), Jaipur (11%), and Vijayawada (11%). The survey was designed to capture a representative sample of the various types of employment (Table A1 and Figure C1) and thus reflected a majority of microentrepreneurs (49%), low-income employees (17%), laborers (16%) and non-contract employees (18%) 9. Figure C1: Type of Employment The sample was further segmented to represent major sectors of economic activities, specifically services (36%), trade (32%), and manufacturing (32%) (Table A1 and Figure C2). Consistent with the nature of the urban areas surveyed, none of the respondents worked in the agricultural sector. The majority of those surveyed reported working from a storefront (63%), while the remainder worked in offices (18%), were ambulant vendors (12%) or operated out of their homes (7%) (Table A1). Figure C2: Sectors of Employment 9 All tables are included in the annex. 9

12 Results of the survey reflect a male dominated business environment in India. The gender distribution of the sample is approximately two-thirds male (72%) and one-third female (28%). The vast majority of respondents are married (83%), while some are single (14%) and a few are divorced, widowed, or separated (3%) (Table A2). The average age of respondents is 35 years, confirming a relatively young Indian population (Table A3). The study showed that the vast majority (91%) of those surveyed have received some type of education. Almost half of the respondents (45%) received primary education, about one-third (28%) received secondary education, and a small percentage (7%) received some college education or completed a college degree (7%). Almost 10 percent were illiterate, while only a small percentage (4%) of those sampled was literate with no formal schooling (Table A2 and Figure C3). Figure C3: Educational Level Approximately half of the respondents reported owning their own homes (49%) and the other half indicated that they are renting (49%). An insignificant percentage of the sample is provided housing by an employer (1%) or living free of charge (1%). For the most part, homeowners hold registered title deeds (65%), an agreement between parties (15%), or a registered sales contract (11%). Very few respondents hold no home ownership documents (9%) (Table A2). C.2. Household Income The typical Indian household surveyed comprises a head of household responsible for supporting an average of three dependents, with some modest contribution from other family members. The average monthly income generated from the respondents primary economic activity is Rs 6,174 (Rs 6,000 median) 10 with another Rs 160 (zero median) from his/her secondary activity, compared to a monthly GDP per capita of Rs 9,450. Families reported average supplemental incomes from their spouse of Rs 1,118 (zero median), from additional sources Rs 115 (zero median), or from other family members Rs 1,240 (zero median). The total household income averaged Rs 8,807 (Rs 8,000 median) with total family expenses averaging Rs 6,291 (Rs 5,970 median), yielding a net household income of Rs 2,516 (Rs 2,000 median) 11. These figures provide the basis for calculating an estimated monthly repayment capacity (equal to one-fourth of total income) of Rs 2,202 (Rs 2,000 median) 12. If we compare this figure with the net household income after expenses and take the lower of the two, we can calculate a more conservative effective monthly repayment capacity of Rs 1,849 (Rs 1,750) $147 mean ($143 median) average monthly income for head of household. 11 Net household income is the difference between total household income and total household expenses. 12 $52 mean ($48 median) effective monthly repayment capacity. 13 Calculated monthly repayment capacity equals 25% of the total household income and the effective repayment capacity is the lower number between the net household income and the calculated repayment capacity.

13 (Table A3 and Figure C4). This amount indicates the maximum cash on hand or excess liquidity available in the household after netting out all expenses, which can be drawn upon to cover the costs of emergencies or to service potential debt. The monthly installment of a future loan should not exceed the value of this available cash. Figure C4: Average Household Income and Repayment Capacity C.3. Housing Quality Housing conditions in India reflect the overall poverty level in the country. Homes have on average two rooms for every four inhabitants (Table A18). Almost half of all respondents (48%) reported living in an independent house, and one-third (32%) live in row houses. The rest live in apartments (7%), attached rooms in a building (7%), or huts (6%) (Table A18). Most of these homes have stable roofs made of concrete (67%) or tin (27%). Kitchens and bathrooms are typically inside the home (86% and 74% respectively) (Table A18). Walls are made of wood (84%) or concrete (14%). While the majority of homes are connected to a public or private water source (82%), or a water tank (5%), 13% have no water connection. The vast majority of the houses have access to formal electricity supply (95%), except a few (4%) who reported having informal electricity connections, while very few cases (1%) reported having no electrical wiring at all (Table A18). C.4. Enterprise Characteristics Almost half of those surveyed (47% or 3,192 respondents) are microentrepreneurs or selfemployed. In order to shed light on the demand for finance of this significant group, this section presents a detailed description of the characteristics of India s microenterprises. Of all microentrepreneurs, almost half (49%) own and operate their own businesses (Table A1 and Table A5), which have been in operation for an average of nine years (7 years median). Most businesses were started with an initial investment of Rs 35,971(Rs 12,000 median) 14 and currently own physical assets (excluding land and building) worth a total present market value of Rs 31,744 (Rs 15,000 median) 15 and inventory worth Rs 20,710 (Rs 7,000 median). Similar to entrepreneurial activities in many countries, startup capital in India is largely self-financed by the entrepreneur (70%) from his or her own savings or retained earnings (Table A6). Few microentrepreneurs indicated having taken a loan from friends or family members (15%) or having received a grant or gift from family members (6%) to establish their businesses. The remainder of the capital came 14 $856 ($286 median) initial start-up capital for microenterprise. 15 $ average present market value of physical assets. 11

14 from: money lenders (5%), the sale of family items (2%), bank loans (1%) or informal saving groups such as Chit funds or Beces 16 (1%) (Table A6). The majority of businesses are sole proprietorships (98%) operated by the owner, without any hired laborers or employees (62%). The remaining microentrepreneurs who have hired labor (38%) at an average of one employee, reported average annual labor costs (part and full-time) of Rs 49,707. Furthermore, the average annual enterprise expenses (including all costs above and beyond raw materials and/or goods) were reported to be Rs 14,884 (Rs 12,000 median) 17 (Table A4). The work premises for most microenterprises are typically rented (42%), owned (40%) or used for free (18%) (Table A5). All of the microentrepreneurs surveyed reported the regular purchase of raw materials or goods for their enterprises. The average annual value of these purchases reached Rs 123,281 (Rs 92,930 median) 18 (Table A7). The predominant mode of payment for these inputs was cash (99%), (Table A8), simultaneously with a small percentage using supplier credit (11%), and very few exceptions reporting the use of advance payments (1%). None reported the use of consignment credit. The average annual value of sales reported over the past twelve months was Rs 246,666 (Rs 210,000 median) 19 (Table A9). Similar to their purchase transactions, microentrepreneurs sell mostly in cash (99%). However, some did report offering customer advances (1%), selling on credit (14%), and occasionally selling on consignment (1%) (Table A10). The primary problems cited by these businesses were weak demand (24%) and domestic competition (23%), followed by various customer problems (15%), and the unavailability of financing sources (8%). The most prevalent secondary problems included domestic competition (20%), customer problems (20%), location (15%), and weak demand (6%). Other challenges listed were weak surrounding infrastructure (5%), labor problems (3%), and a variety of issues commonly noted by microentrepreneurs (Table A11). C.5. Availability of Informal Financing (1) Effective Demand for Informal Loans The informal financial market in India is extremely active and provides a very important source of financing for many low-income clients. The vast majority (99%) of those surveyed (including microentrepreneurs as well as contract and non-contract employees and labor) have requested informal loans at some point in time. When asked about borrowing patterns over the past 12 months, the majority of the sample (96%) reported receiving informal loans either from friends (44%), family (23%), money lenders (23%), or colleagues (9%). An insignificant share of the sample (less than 1%) reported being denied informal loans (Table A12). When asked about the most significant loan amount taken during the past year, respondents reported asking friends (44%), moneylenders (23%), family (22%), and colleagues (10%) (Figure C5). These informal loans were typically disbursed within six days (three days median). The average value of these informal loans was Rs 9,345 (Rs 5,000 median) 20 with an interest amount of Rs 989 (zero median) and an eight-month repayment period. The average value of collateral used was low at 9% of the total loan value (zero median), since few borrowers were actually required to present collateral. Those who did provide collateral (8%) did so at an average value of 116 percent of the loan amount (Table A12). Informal loans were used for a variety of purposes, among which were primarily personal use (74%), business (18%), home improvement/repairs (7%) and in a few cases home purchases (1%) (Table A12). 16 Chit funds or Beces are the Rotating Savings and Credit Associations (RoSCAs) as they are known in India. 17 $ average value of enterprise annual expenses. 18 $2, average annual value of purchases. 19 $5,873 average annual value of sales. 20 $222 ($119 median) average value of informal loans.

15 Figure C5: Sources of Informal Loans (2) Participation in Informal Groups In addition to individual loans from friends, family and money lenders, the survey shows that low-income earners participate in a variety of informal savings and loan associations known as Chit groups or Beces. Almost one-fourth of all respondents (23%) reported participating in informal groups with an average of 20 members (Table A16). On average, members make one monthly contribution of Rs 768 (Rs 500 median) 21 to the group (Table A16). Additionally, some of the respondents (11%) reported saving with informal collectors. The average deposit over the last year amounted to Rs 11,424 (Rs 6,000 median). Surprisingly, an insignificant percentage of respondents reported receiving remittances (0.1%) amounting to Rs 32,166 (Rs 26,000 median) over the past twelve months. A higher percentage of respondents indicated making money transfers (7%) or receiving money transfers (1%) (Table A16). C.6. Effective Demand for Formal Financial Services Respondents were also asked an array of questions regarding the availability and use of formal financial services in order to better understand the obstacles that low-income groups face in accessing the mainstream financial sector. Not surprisingly, an overwhelming majority of the surveyed respondents (95% or 6,247 observations) reported never requesting a formal loan from a bank or other financial institution (Table A13). The main reasons cited were difficult and lengthy bank procedures (23%), lack of financial documents (22%), followed by high interest rates (18%), and lack of collateral (12%). This trend of self-selection out of the formal credit market by low-income groups in India is not unique and is similar to the behavior exhibited by many low-income earners around the globe. Of those who applied for a formal loan (5% or 328 respondents), almost half (42% or 138 observations) were denied due to lack of financial documents (49%), confirming respondents concerns noted above. Additional reasons for loan denial reported by the respondents were lack of collateral (21%), lack of bank relations (12%), and unregistered business (7%) (Table A13). From these applications, 23 loans (7%) were approved but not collected due to fear of being unable to repay, or a preference to source credit elsewhere. 21 $18.29 monthly contribution to informal rotating group, i.e. around $219 annual contribution to informal rotating group. 13

16 Over the past three years, only a very small percentage of respondents (2% or 165 observations) reported taking a formal loan (Table A14), the majority of whom (87%) are still repaying their obligation. These loans were largely used for businesses (39%), home improvements (28%), personal purposes (23%), or mortgages (10%) (Table A14 and Figure C6). The average loan amount was Rs 116,242 (Rs 70,000 median) 22, with a 9.6 percent annual interest rate (9% median) (Table A14). These loans had an average monthly installment of Rs 2,596 (Rs 2,200 median), with a 56-month loan term (36 months median). The borrowers typically provided up to 83 percent (100% median) of the loan value in collateral. A variety of different types of collateral were provided including buildings (23%), bank accounts (22%), land (15%), and guarantors (15%). Only 9 percent of respondents indicated that they did not use any collateral (Table A14). The rather high loan size, roughly equal to average gross income, and the high monthly payments (exceeding the average effective repayment rate of 1,849) would seem to suggest that formal credit is only accessible for the wealthier segments of the population; namely those who possess the collateral generally needed to secure these loans (Table A15). Figure C6: Types of Formal Loans It is important to highlight that while there is limited use of formal loans among low-income earners, the majority of the respondents (68%) reported holding a deposit account with a bank (Table A15). Typically, each respondent holds on average one account. C.7. Potential Demand for Individual Loans Low-income economic agents meet their demand for finance using largely an array of informal social structures and in part access to formal financial institutions. The current use of these existing financial services, i.e., effective demand, is based on the real transactions demonstrated in the market. In addition to assessing the effective demand, it is important to identify the terms, conditions and services that are either currently unavailable or perceived to be so by the target population, which if available could spur latent or potential demand for formal financial services. 22 $2,768 average formal loan taken by respondents.

17 When asked about their desire to receive a formal individual loan, more than half of the sample (64%) responded positively (Table A17). The highest demand was for business loans (54%), followed by housing loans (28%), and personal loans (22%). Respondents interested in business loans reported an average potential demand of Rs 62,849 (Rs 50,000 median) 23 with an average repayment period of 47 months (36 months median). Those noting a preference for personal loans reported an interest in loan amounts of Rs 38,828 (Rs 25,000 median) 24 with an average repayment period of 36 months (30 months median). And respondents interested in housing loans were looking for average loan amounts of Rs 127,113 (Rs 100,000 median) 25 with average repayment periods of 76 months (60 months median), and average monthly installments of Rs 1,944 (Rs 1,900) 26. C.8. Potential Demand for Housing Loans More than half of the sample (55%) reported having undertaken some sort of home improvement over the past five years, including painting (90%), flooring (21%), windows (19%), doors (18%), kitchen (9%) or building an additional room (8%) (Table A19). Total expenditures for these home improvements averaged Rs 13,302 (Rs 5,000 median) and were financed for the most part with personal savings (82%), followed by informal loans (11%), family assistance (6%) and formal loans (1%) (Table A19). One-fourth of all respondents (28%) reported an interest in taking home improvement loans (Table A17). Of those, about half (45%) indicated that they would use the funds for home improvements, while one-third (33%) would use the loans for mortgages, and the rest (22%) to construct a new house. Respondents 27 interested in taking housing loans reported their willingness to pay an average interest charge of 7 percent (6% median) and fees of 1 percent (1% median). Almost one-third of the interested respondents were willing to provide a guarantor as collateral (29%), building (23%), or bank account (18%). Few of the respondents were willing to provide land, machinery, salary guarantee, and jewelry as collateral, while some (17%) were totally unable to provide any collateral (Table A17). Homeowners represent about half of the sample (49%). Roughly one-tenth (10%) of all home homeowners were interested in moving or constructing a new house. The estimated cost of a potential new home was about Rs 487,970 (Rs 450,000 median) 28. New homes could take the form of a detached house (31%), a row house (25%), an attached room in a building (24%) or an apartment (19%). The most prevalent financing source available to construct a new home is a formal loan (44%). Other financing sources include: raising funds by selling the current house (37%), personal cash (10%), informal loans (6%) or government subsidy (3%) (Table A20). Additionally, over half of homeowners (62%) indicated a willingness to undertake home improvements in the future, including painting (85%), building an additional room (13%), repairing the floors (22%), repairing the windows (24%), fixing the ceiling (18%) and repairing the doors (21%). Others would use the funds to build a kitchen (18%) or 23 $1, average potential demand for business loans. 24 $ average potential demand for personal loans. 25 $3, average potential demand for housing loans. 26 $46.29 average monthly installment for housing loans. 27 Only respondents interested in housing loans provided answers for this section. 28 $11, estimated cost of a potential new home. 15

18 a bathroom (19%). It is estimated that the average cost of these improvements would be Rs 25,668 (Rs 10,000 median) 29. Some respondents reported that they could complete the work without additional labor (22%) and thus save on labor costs. Respondents reported having an average value of Rs 11,619 (Rs 5,000 median) in savings that could also be used for a home improvement. About a third of the respondents who are interested in undertaking home improvements over the next five years reported that they would borrow from formal institutions (21%) or from informal sources (8%) to finance the improvements. This group indicated that they would be able to repay Rs 1,117 (Rs 1,000 median) in monthly installment to service these loans (Table A21). Of those who currently rent (49%) or live free of charge or in employer accommodations (2%), again about half of the overall sample, approximately one-quarter (26%) are willing to buy or construct a new home. Currently, few (12%) of these non-homeowners already own land suitable to build a house. Several means of land acquisition were cited among the 707 non-landowning respondents: formal purchase (49%), government subsidy (27%), and informal purchase (18%). The reported average cost of land was Rs 182,131 (Rs 150,000 median) and the average cost of building or buying a new house was Rs 237,985 (Rs 200,000 median) 30. Non-home owners are willing to finance the purchase or the construction of their new home with a formal loan (54%), government subsidy (18%) informal loan (12%) and personal savings (14%). As for the structure of the new house, the majority (73%) reported interest in acquiring a detached house while some (13%) preferred a row house, others (6%) chose to buy a flat or an apartment, while a few (6%) reported a preference to acquire an attached room in a building (Table A22). 29 $ average cost of potential home improvements. 30 $5, average cost of building/buying a new house.

19 D. Variations by Repayment Capacity The estimated repayment capacity of the sample exhibited a wide degree of variation. While the mean was Rs 1,849 and the median Rs 1,750, the actual values ranged from Rs 150 to Rs 7,500. This wide spectrum prompted a disaggregation of the data into two groups to better understand some of the dynamics behind the various patterns in the demand for financial services. The first group (Group A) is made up of those with a repayment capacity of up to Rs 2,000 ($48 USD) and the second group (Group B) is made up of those with a repayment capacity of more than Rs 2,000 ($49 USD). It is interesting to note, particularly given the large sample size, that Group A, those with a lower repayment capacity, make up about two-thirds of the sample (62%) with 4,105 respondents, while Group B represents just over one-third (38%) with 2,470 respondents. This section of the report presents an assessment of the variations between the two groups based on the respondents capacity to repay. As expected, there is a slight difference between the two groups with respect to home ownership. Group B (56%), those with a higher repayment capacity, contained a slightly larger number of homeowners than Group A (45%). Inversely, Group A contained a higher number of renters (53%) than Group B (43%). While Group B had a slightly higher average number of inhabitants in the house (5 members versus 4), both groups have the same number of rooms in the house and a similar pattern in the types of homes. The only marked difference is that more of Group B, those with the higher repayment capacity, has a kitchen and bathroom inside their homes. The most important difference lies in the average household income of the two groups. Group A demonstrated an average total monthly household income of Rs 6,702 (Rs 6,500 median) 31 and average effective monthly repayment capacity of Rs 1,152 (Rs 1,200 median) 32, while Group B has almost double the total household income at Rs 12,304 (Rs 12,000 median) 33 with an average effective monthly repayment capacity of Rs 3,006 (Rs 2,750 median) 34 (Table B3 and Figure D1). The vast majority of microentrepreneurs in both Group A (61%) and Group B (65%) worked from storefronts. Home-based microenterprises were the least common business location reported by the respondents from both groups. Repayment capacity is split roughly the same among economic activities, namely trade (Group A 31% and Group B 33%), manufacturing (Group A 34% and Group B 30%), and services (Group A 35% and Group B 37%). Figure D1: Variations of Household Income and Repayment Capacity 31 $ average total monthly household income for Group A. 32 $27.43 average effective monthly repayment capacity for Group A. 33 $ average total monthly household income for Group B. 34 $71.57 average effective monthly repayment capacity for Group B. 17

20 Figure D2: Use of Financial Services by Repayment Capacity With respect to the use of the formal banking sector, Group B reported a significantly higher use of deposit accounts in formal institutions (84%) than Group A (58%), (Table B8), which is not surprising given the significantly higher level of net income among this group. As expected, it was not common for either group to request formal loans. Very few respondents in Group A (2% or 71 observations) and Group B (4% or 92 observations) reported having used a formal loan. Group A used formal loans with an average value of Rs 130,528 (Rs 70,000 median) 35 and an interest rate of 10 percent (8% median), for an average loan term of 62 months (42 median). Surprisingly, Group B had a slightly lower average loan value Rs 105,217 (Rs 66,000 median) 36 and an interest rate of 9 percent (9% median), for an average loan term of 52 months (36 median). It is noteworthy to mention that the vast majority of both groups (Group A 89%, and Group B 88%) reported using formal loans for housing purposes. Regarding the informal financial sector, it is interesting to note that respondents from both groups actively save with informal saving groups (Chit groups or Beces), and informal collectors. One-fifth of Group A (20%) contribute on a monthly basis to informal groups an amount that averaged Rs 603, while the monthly contribution of about one-third of the respondents in Group B (28%) was slightly higher at Rs 968. Additionally, respondents were able to save with informal collectors. During the past year, approximately one-tenth of the respondents in Group A (12%) were able to save at an average of Rs 8,481 (Rs 6,000 median), while another one-tenth among Group B (10%) managed to save almost double that amount at Rs 17,226 (Rs 10,000 median). The potential demand for formal loans was almost the same among Group B (65%) and Group A (63%) respondents. Interestingly, business loans are the most demanded and equally desired by Group A (54%) and Group B (54%). As for housing loans, they were also highly demanded by both groups (Group A 26%, Group B 31%). Moreover, the housing loan amount had the highest value among all potential formal loans, with Group B reporting a higher loan value (Rs 164,891) than Group A (Rs 99,002). Finally, personal loans were the least demanded among Group A (23%) and Group B (19%) (Table B10). Almost half of both groups (54% Group A and 57% Group B) have undertaken a home improvement in the past few year. The cost of these improvements stand in sharp contrast between the two groups, where those with the higher repayment capacity reported spending twice as much (Rs 19,292) as those with the lower repayment capacity (Rs 9,463). Among the non-homeowners, there was a substantial number among Group A (26%) and Group B (27%) who was willing to build or purchase a home. Among those, a few already own land for this purpose (Group A 3%, Group B 2%). Those in Group A who do not own land (55%), estimated the cost of acquiring land to be at Rs 152,919 (Rs 100,000 median) with the cost of building a home at Rs 196,582 (Rs 150,000 median). Those in Group B who do not own land (44%) had a higher land cost estimate at Rs 246,800 (Rs 200,000 median) as well as the cost of building a home at Rs 321,075 (Rs 300,000 median). 35 $3, average value of used formal loans for group A. 36 $2, average value of used formal loans for group B.

21 E. Variations by Type of Employment E.1. Socio-Economic The sample represents four main types of employment among low-income earners in India: microentrepreneurs (49%), employees (17%), wage laborers (16%) and non-contract employees (18%). Non-contract employees are concentrated primarily in the service sector (48%), with the other types of employment distributed more or less evenly across trade, manufacturing, and services sectors (Figure C1). Employees and microentrepreneurs have roughly the same average monthly income (Rs 9,096 and Rs 9,744 respectively), indicating a similar level of well-being. Non-contract employees reported an average total household income of Rs 7,826 (Rs 7,000 median) while wage laborers reported a significantly lower average total household income of Rs 6,769 (Rs 6,000 median). Taking total expenses into account, microentrepreneurs are left with a slightly higher effective monthly repayment capacity (Rs 2,094) than employees (Rs 1,927), followed by non-contract employees (Rs 1,587) and wage laborers (Rs 1,316). Microentrepreneurs made up the largest group of respondents from Group B (61%), and notably less in Group A (42%). In keeping with income levels, wage laborers and non-contract employees were more concentrated in Group A (21% and 21% respectively, than in Group B (7% and 13% respectively). Not surprisingly, home ownership was reported to be highest among microentrepreneurs (55%) followed by non-contract employees (49%), while employees (54%) and wage laborers (60%) were more likely to rent. Figure E1: Household Income and Repayment Capacity by Employment Type E.2. Housing Quality Across the various types of employment, respondents reported similar housing conditions. Non-contract employees, in particular, live in the most run-down type of housing; many reported residing in houses with mostly tin or corrugated metal roofs, with bathrooms and kitchens outside the house. While half of the sample across all types of employment undertook home improvements, the costs of these improvements were highest among microentrepreneurs and employees, followed by non-contract employees, and last wage laborers paying the least. 19

22 E.3. Use of Financial Services The overwhelming majority of respondents (between 98%-99%) from all employment types reported having requested an informal loan sometime in the past, most of whom have borrowed within the last 12 months. While it is clear that all employment types rely heavily on informal mechanisms to meet their demand for finance, microentrepreneurs have demonstrated the highest average loan balance (Rs 11,435), followed by employees at (Rs 8,773), wage laborers (Rs 6,600) and non-contract employees (Rs 6,861). When it comes to borrowing, most respondents do not see the formal financial sector as a source of financing to meet their personal and business needs. This is demonstrated by the low participation rate in the formal credit markets over the past three years, with only a few of all respondents (1%-3%) in each group having reported taking a loan. This is a common phenomenon among low-income earners in developing countries who self-select themselves out of the formal financial sector. However, what is interesting to note is that of those who are able to take a formal loan, over a third use it for housing purposes. About half of the wage laborers (49%) reported holding a bank account while the majority of microentrepreneurs (73%), employees (75%) and non-contract employees (65%) hold deposits in banks and formal financial institutions. Although demonstrated demand in the form of actual loans taken was low, when asked about interest in taking a formal sector individual loan, respondents demonstrated a strong potential demand across all types of employment, particularly among microentrepreneurs (69%). Business loans were the most in demand across all employment types, except for wage employees, who preferred housing loans. As would be expected, microentrepreneurs were most interested in taking business loans (73%) followed by non-contract employees (40%) and wage laborers (39%). As noted, employees reported a preference for housing loans (40%) followed by noncontract employees (30%), wage laborers (28%) and microentrepreneurs (24%). High potential demand for personal loans was reported among employees (36%), wage laborers (36%) and non-contract employees (34%), but much less so among microentrepreneurs whose potential demand for these products was relatively limited (9%). Figure E2: Use of Financial Services by Employment Type Across all types of employment, homeowners expressed a higher interest in undertaking home improvement than moving or constructing a new house. This interest was quite significant across all types of employment including non-contract employees (67%), microentrepreneurs (62%), wage laborers (61%) and employees (59%). Additionally, employees were willing to pay the highest cost to complete potential home improvements (Rs 32,050) followed by microentrepreneurs (Rs 27,154), non-contract employees (Rs 21,175) and finally wage laborers (Rs 18,512). Interestingly, all respondents had approximately half the home improvement costs in savings.

23 F. Regional Variations The sample was collected across six different cities: Mumbai (26% or 1691 observations), New Delhi (20% or 1343 observations), Jaipur (11% or 706 observations), Chennai (17% or 1097 observations), Vijayawada (11% or 714 observations), and Bangalore (15% or 1,024 observations). Given the vast distances between and the diversity among these different geographic areas, it is not surprising that there were considerable regional variations that need to be taken into account. F.1. Socio-Economic The average total monthly income for the respondents was relatively similar in four of the six areas: New Delhi, Rs 9,812(Rs 9,000 median); Chennai, Rs 9,642 (Rs 9,000 median); Bangalore, Rs 9,307 (Rs 9,000 median); and Mumbai Rs, 9,224 (Rs 9,000 median). Respondents in the other two regions had significantly lower total household incomes: Vijayawada, Rs 6,730 (Rs 6,000 median) and Jaipur, Rs 5,968 (Rs 5,250). The repayment capacity was also significantly lower in these two regions: Rs 1,453 (Rs 1,250 median) in Vijayawada and Rs 879 (Rs 700 median) in Jaipur, compared to about Rs 2,000 in the other four regions. Figure F1: Household Income and Repayment Capacity by Region Those with a higher repayment capacity extending beyond Rs 2,000 tend to be located in Mumbai (30%), New Delhi (25%), Bangalore (19%) and Chennai (18%). Only a very small percentage (2%) resides in Jaipur, and in Vijayawada (6%). Those with a repayment capacity below Rs 2,000 are fairly evenly distributed geographically among Mumbai (23%), New Delhi (18%), Jaipur (16%), Chennai (16%), Vijayawada (14%), and Bangalore (13%). Results of the survey show that home ownership varies widely throughout the regions. While one would expect the high concentration of home owners found in Mumbai (78%), it is quite surprising that Jaipur ranks second (68%) in terms of home ownership given its significantly lower household income levels and repayment capacities. In contrast, Bangalore, with its high household income levels (Rs 9,307) displayed the lowest concentration of home owners (19%), whereas Chennai (33%), New Delhi (40%) and Vijayawada (44%) reported moderate home ownership. Consistently, Bangalore has the highest number of renters (80%) fol- 21

24 lowed by Chennai (65%), New Delhi (57%), Vijayawada (54%), Jaipur (32%) and Mumbai (21%). There are particularities across different regions, such as the high value of land in Bangalore versus a much lower land value in Jaipur, and availability of housing stock in the various regions, that explain some of the observed patterns. F.2. Housing Quality Across the six regions, respondents reported similar housing conditions except for those who live in Mumbai. While the majority live in independent homes, those who live in Mumbai reside mostly in row houses with tin roofs. Interestingly, many variations exist across the regions when comparing the percentage of those who undertook home improvements and the associated costs. The patterns demonstrate that the highest percentage of respondents who undertook home improvements reside in Jaipur, where the costs of improvements are the least expensive, followed by Vijayawada, in comparison with Bangalore where only a small percentage undertook home improvements and with very modest costs. Chennai has the highest reported costs for home improvements follow by Mumbai and Delhi. F.3. Use of Alternative Financial Service Over the past 12 months, the vast majority (95% to 98%) of respondents in the surveyed cities requested an average of one informal loan. Two areas exhibited a high loan value, namely Mumbai where respondents reported average loan sizes of Rs 12,109 (Rs 10,000 median) with eleven-month repayment periods (10 months median); and Bangalore where respondents reported average loan sizes of Rs 11,394 (Rs 7,000 median) and an eight-month average repayment period (5 months median). In cities such as Vijayawada and Jaipur, the average loan values were significantly less at Rs 4,673 (Rs 3,000 median) with a six-month repayment period (4 months median) and Rs 5,396 (Rs 3,000 median) with a seven-month repayment period (5 months median), respectively. There was little variation in accessing a formal loan by region, since the vast majority (95%) reported never having requested a formal loan. However, this does not mean that this segment of the population is unbanked. In fact it is quite the contrary: the majority of respondents do hold savings accounts, whether in Mumbai (81%), Chennai (78%), Bangalore (70%), New Delhi (61%), or Vijayawada (56%). The frequency is relatively lower in Jaipur (44%) than in other regions where less than half of the respondents hold bank accounts. Of the small number of respondents who did report taking a loan in the past three years (5% in Jaipur, 3% in Chennai, 2% in Vijayawada, 2% in New Delhi, 1% in Bangalore, 2% in Mumbai), interest rates were fairly similar across all regions: 8% in Jaipur and Vijayawada, 9% in Bangalore, 10% in Mumbai and Chennai and 11% in New Delhi. Average loan terms varied significantly from a long repayment period of 74 months in Mumbai and 63 months in Chennai to shorter periods in Bangalore (49 months), Jaipur (47 months), Vijayawada (43 months) and New Delhi (40 months). Results of the survey also revealed marked differences in the loan value across the regions. Surprisingly, respondents from Jaipur, the least banked with the lowest total household income, reported taking the highest formal loans, averaging Rs 163,227 (Rs 107,500 median) over a 47-month repayment period, with an average monthly installment of Rs 3,281 (Rs 2,500 median). This formal loan represents almost 27 times the average monthly income of Jaipur households. The smallest formal loans were taken by respondents from Vijayawada at Rs 67,400 (Rs 50,000 median) with an average monthly installment of Rs 1,976 (Rs 1,500 median) and New Delhi at Rs 68,875 (Rs 50,000 median) with an average monthly installment of Rs 2,209. In comparison to respondents in Jaipur, these loans represent ten and seven times the average monthly income of Vijayawada and New Delhi households, respectively (Table D7).

25 Respondents save with informal collectors throughout all the regions. Over the past twelve months, respondents in the Jaipur sample (21%) reported saving on average Rs 5,026 while their counterparts in Vijayawada (32%) saved almost three times as much at an average of Rs 14,978. In contrast, only a negligible percentage of Bangalore respondents (0.1%) saved Rs 2,075 with informal collectors. Figure F2: Use of Financial Services by Region Potential demand for individual formal loans was strong among the majority of the respondents. Although microentrepreneurs were almost equally distributed across the six regions, the highest demand for business loans was reported in Jaipur (69%) followed by New Delhi (61%) and Vijayawada (60%), while it was lower in Bangalore (49%), Chennai (47%), and Mumbai (37%). The value of potential business loans varied from as low as Rs 41,009 in Vijayawada to as high as Rs 129,530 in Bangalore. Housing loans were the second most sought after loan product. Among those who are interested in a potential formal loan, many in Mumbai (42%) were interested in housing loans averaging Rs 116,407 (Rs 50,000 median) over a 76-month repayment period. Respondents in Bangalore (38%) and Chennai (38%) were relatively more interested in housing loans than respondents in the remaining three regions. It is noteworthy to mention that the highest potential loan value was reported in Bangalore (Rs 179,159) where the respondents are the least likely to own a house (19%). Most homeowners across all regions were interested in undertaking home improvements: Mumbai (70%), New Delhi (79%), Jaipur (54%), Chennai (58%), and Vijayawada (46%). Respondents in Bangalore were more hesitant about taking home improvement (only 18% were interested), which may be linked to low home ownership (19%) among this group. The estimated value of home improvement cost was considerably higher in Chennai at Rs 82,732 (Rs 60,000 median) followed by Bangalore at Rs 55, 305 (Rs 15,000 median), Vijayawada at Rs 34,031 (Rs 20,000 median), New Delhi at Rs 18,772 (Rs 10,000 median), Jaipur at Rs 17,098 (Rs 5,000 median) and surprisingly least in Mumbai at Rs 15,775 (Rs 10,000 median). Respondents in Chennai had an average savings of Rs 21,530 (Rs 15,000 median) that they could potentially invest in their home improvement projects. Respondents in Bangalore reported an average of Rs 17,250 (Rs 7,500 median) in savings while respondents in Jaipur reported the lowest savings amounts with an average of Rs 4,737 (Rs 2,000 median). 23

26 Only a small percentage of homeowners were willing to move or construct a new home (Mumbai 15%, Bangalore 18%, Jaipur 6%, Chennai 5%, Vijayawada 3% and New Delhi 3%). The highest average cost of a new home was in Mumbai (Rs 563,686), followed by New Delhi (Rs 487,500), Bangalore (Rs 428,005), Chennai (Rs 347,058), Jaipur (Rs 255,333) and Vijayawada (Rs 174,090). Additionally, the survey involved respondents who do not currently own a house. High percentages of non-homeowners in Jaipur (66%) and Mumbai (45%) reported willingness to buy or purchase a new house. The percentage was considerably lower in the other regions, namely Chennai (31%), Vijayawada (18%), Bangalore (17%) and New Delhi (16%). Of those interested in buying or building a new home, some already own land for such a purpose (New Delhi 44%, Vijayawada 15%, Bangalore 9%, Mumbai 9%, Chennai 6% and Jaipur 1%). Thus, the reported amounts needed to acquire a new house in Bangalore, were broken down into the average values of home construction (Rs 37,717) and land purchase (Rs 232,598). However, Jaipur is the region with the lowest average cost of land (Rs 86,666) and housing prices (Rs 115,168).

27 G. Gender Variations The gender distribution across the various regions, sectors and types of employments is almost equal by design. The survey attempted to reflect the characteristics and patterns for male and female active economic agents so the sample selection stratified those factors a priori. The sample, however, has almost twice as many male respondents (72%) as females (28%). Examining the location of employment reveals, unsurprisingly, that more females operate from home (13%) than males (5%), with the balance slightly tipped to more males operating from stores (65%) than females (58%). Interestingly, home ownership exhibits the same pattern for both male and female respondents in the survey. Among the differences between economic agents based on the gender factor is the income level. Female economic agents have a lower average monthly income than male economic agents (Rs. 5,004 versus Rs. 6,636). When considering the other sources of income for the households, including the spouse, these income levels yield a higher average total household income for female respondents than male respondents (Rs. 9,216 and Rs. 8,615 respectively), and thus result in a higher average effective monthly repayment capacity for female rather than male respondents (Rs. 1,978 versus Rs. 1,797). The use of informal loans and the size of the loans used over the past year confirm the repayment capacities of female and male economic agents. Illustrating this finding is the fact that the informal loans used by both males and females were similar in size (Rs. 9,415 by males and Rs. 9,168 by females) and maturity (8 months on average for both). The use of formal loans, however, differed particularly in terms of the size of loans (Rs. 129,357 used by males and Rs. 71,581 used by females). The difference in the loan amount coupled with the difference in loan maturity (61 months versus 40 months for males and females respectively), again yields a similar monthly installment (Rs. 2,311 for males and Rs. 2,100 for females). In addition to this interesting outcome, on the one hand, there was absolutely no difference in the percentage of females versus males holding deposit accounts (68% for both). Participation in informal groups, on the other hand, was more predominant among female respondents (30%) compared to male respondents (21%). The similar average monthly contributions by both females and males hovered around Rs. 809 and Rs. 744, respectively. Moreover, while savings with informal collectors did not vary in terms of the percentage of males and females who saved (11% for both groups), the average amount saved over the past year varied slightly (Rs. 11,992 by males and Rs. 9,978 by females). Gender differences were almost non-existent when examining the potential demand for all types of loans. The majority of both groups (64%) were quite interested in various types of loans, with a few more males interested in business loans (56%) than females (49%), and a few more females (26%) interested in personal loans than males (20%), yet both equally interested in housing loans (28% for males and 29% for females). Additionally, the potential loan amounts desired were quite similar across all types of loans by both groups. 25

28 Most importantly, the housing quality in terms of the type of the home, the number of rooms in the house, the type of roof, the kitchen and bathroom being inside or outside the house and the water and electric connections did not exhibit any differences by gender. Similarly, almost equal percentages of males and females reported undertaking home improvements (56% and 53% respectively) that were of approximately the same costs (Rs. 13,897 and Rs. 11,779 respectively), again mostly financed from personal savings. When asked about their interest in undertaking future home improvements, again the same level of interest was demonstrated and similar projections were given for the costs of these improvements. One slight difference stands out, ironically, in that a few more females reported an ability to complete the improvements themselves (27%) than males (19%). Thus, it is quite valid to conclude that in India, based on the results of this comprehensive research, no marked differences were exhibited in the use of financial services between men and women. The gender factor has a slight impact on the use of a particular channel, namely the informal groups or chit funds, but otherwise and interestingly so, a very similar pattern was observed for men and women in their use of and potential demand for financial services.

29 H. Market Opportunities The market demand assessment for housing finance in India allows us to depict the financial profile of low-income households in the country, and facilitates a better understanding of the effective and potential demand for financial services, in general, and housing finance in particular, among the low-income population. The survey focused on a representative sample of low-income earners in various regions of India, and included a wide range of economic actors (including microentrepreneurs, low-income employees, laborers and non-contract employees) working in the three major sectors of economic activities (services, trade, and manufacturing). Results of the survey showed that the typical respondent is a 35-yearold head of household with a family of 4 living in a rented or owned home. The respondent s primary source of income averages Rs 6,174 reaching Rs 8,807 when considering all other sources of income. The average total household expenses amounts to Rs 6,291, leaving the household with Rs 2,516 cash, a Rs 2,202 average calculated repayment capacity, and an effective monthly repayment capacity of Rs 1,849. The calculated and the effective repayment capacity figures are rather close, indicating that the cash on hand is quite close to the effective repayment capacity. Hence, in order to reduce the risk of delinquency among potential borrowers in this segment of the population, monthly installments on microloans should not exceed the monthly effective repayment capacity. With respect to business ownership, the study results indicate that most microentrepreneurs (half of all respondents) are owners of their enterprises, and that the majority runs their business from stores without any hired labor. Microenterprises tend to be sole proprietorships, mainly buying and selling goods in cash, with a few using supplier-credit or extending credit facilities to their regular clients. Weak demand and domestic competition are the leading two challenges reported by microentrepreneurs. The findings highlighted that almost all respondents meet their financial demand through the extensive use of informal loans (Figure H1). The vast majority of the respondents used informal loans over the past year, with an average loan amount of Rs 9,345 for an average repayment period of eight months. Loans were mostly used for personal purposes. In addition, there was significant participation in informal savings groups, with approximately one-quarter of the sample reporting participation in RoSCAs, with an average monthly share contribution of Rs 768. Reliance on the formal sector was scarce. The survey revealed that the vast majority of low-income earners had never requested a formal loan mainly due to lack of financial documents and lengthy procedures. This was confirmed by the high rejection rates owing to these reasons. Interestingly, and contrary to their self-selection out of the formal loan market, a high percentage (almost two thirds) of these economic agents hold deposits in formal institutions. In contrast to the limited effective demand for formal financial sector loans, there was considerable interest in future individual loans (64% 27

30 of respondents), with preference for business and housing loans. The average housing loan demanded was Rs 127,113 with a repayment period of 76 months, to be used primarily for home improvement, mortgages, and construction material. The average monthly installment of Rs 1,944 is in line with the estimated repayment capacity of the respondents. Figure H1: Use of Financial Services in India Variations in the use of and demand for financial services were also examined. These variations existed particularly when exploring the trends in the different types of employment and regions, as well as considering the different repayment capacities. Among the most important variations are the differences in the repayment capacity within the country. Here, it was found that roughly two-thirds of the sample has a repayment capacity of less than Rs 2,000, with entrepreneurs making up the bulk of those with higher repayment rates of above Rs 2,000. Interestingly, for the most part, gender differences did not exist in the use of and potential demand for financial services. Despite the lack of consistent correlation between household income levels and home ownership across regions, microentrepreneurs made up the largest group of home owners; whereas, wage laborers and employees are more likely to rent. Mumbai has the highest concentration of home owners, while Bangalore has the lowest, despite the relatively high-income levels. Finally, regarding formal loans, Jaipur, the least likely to be banked given that it has the lowest household income levels, reported taking the highest formal loan amounts. Lastly, in addition to assessing the potential demand for existing financial services among low-income earners, this study begins to identify opportunities for new financial products that can be developed to meet the specific needs of this market segment. This is particularly the case when examining the housing sector niche, which offers ample room for expansion and growth. By assessing potential housing loan demand, this study sheds light on the nature of this demand, giving specific indications on the size, terms, conditions and costs of individual loans that respondents would be willing to take to meet their ongoing housing needs. Financial service providers who are willing to better understand the specific characteristics of low-income clients and the nature of their economic activities will be extremely successful in penetrating this new market. In particular, financial service providers should look at the estimated monthly repayment capacity as a key indicator of the loan amounts and monthly repayment rates that on average could be afforded by the group.

31 Development Finance Market Assessment in India December 2008 Appendix A Market Survey Overall Descriptive Tables 29

32 The Market Survey Table A1. General Characteristics of the Market Survey % of Total Sample (n= 6,575) Location/City Mumbai New Delhi Jaipur Chennai Vijayawada Bangalore Type of Employment Entrepreneur Employee Entrepreneur & Employee Wage Laborer Non-contract Employment Location of Employment Home Store Office Ambulant Sectors Trade Manufacturing Services 26% 20% 11% 17% 11% 15% 47% 17% 2% 16% 18% 7% 63% 18% 12% 32% 32% 36% Source: India Market Research Survey, 2007

33 Table A2. Selected Characteristics of the Economic Agents Gender Male Female Marital Status Single Married Divorced/Widowed Educational Level Illiterate Literate & no Formal Schooling Primary Schooling SSC/HSC College but did not Graduate Graduate Home Ownership Owner Free of Charge Rent Provided by Employer Home Documents for Home Owners Registered Title Deed Registered Sales Contract Agreement between Parties None % of Total Sample (n= 6,575) 72% 28% 14% 83% 3% 9% 4% 45% 28% 7% 7% 49% 1% 49% 1% 65% 11% 15% 9% Source: India Market Research Survey,

34 Table A3. Selected Income and Expense Measures for the Economic Agents Avg. Age of the Agent Avg. Number of Dependents (Including Head of Household) Avg. Number of Individuals Contributing to Family Income Avg. Monthly Income for Economic Agent (Rs) Avg. Monthly Income from Second Source for the Head of Household (Rs) Avg. Spouse Monthly Income (Rs) Avg. Monthly Income from Other Sources for the Head of Household (Rs) Avg. Monthly Income from Other Family Sources (Rs) Avg. Total Household Income (Rs) Avg. Total Household Expenses (Rs) Avg. Net Household Income (Rs) Avg. Calculated Monthly Repayment Capacity (Rs) Avg. Effective Monthly Repayment Capacity (Rs) Total Sample (n= 6,575) 35 (35) 4 (4) 2 (2) 6,174 (6,000) 160(0) 1 1,118 (0) (0) 3 1,240 (0) 4 8,807 (8,000) 5 6,291 (5,970) 6 2,516 (2,000) 7 2,202 (2,000) 8 1,849 (1,750) 9 Source: India Market Research Survey, 2007 Note: Values in parenthesis represent the medians. Table A4. Profile of the Enterprises in the Market Survey Establishment Profile Avg. Number of Years in Operation Avg. Value of Initial Investment (Rs) Avg. Present Market Value of Physical Assets (Rs) Avg. Present Market Value of Inventory Avg. Number of Start-up Employees Avg. Number of Current Full Time Employees Avg. Labor Cost / year (Rs) Avg. Enterprise Expenses / year (Rs) Total Sample (n= 3,192) 9 (7) 10 35,971 (12,000) 11 31,744 (15,000) 12 20,710 (7,000) (0) (0) 15 19,014 (0) 16 14,884 (12000) 17 Source: India Market Research Survey, 2007 Note: Values in parenthesis represent the medians.

35 Table A5. Selected Characteristics of the Entrepreneurs and their Enterprises in the Market Survey Total Sample (n=3,192) Position in Business Owner Ownership of Business Owner Rent For Free Form of Business Ownership Proprietorship Partnership 100% 40% 42% 18% 98% 2% Source: India Market Research Survey, Table A6. Sources of Investment Capital Reported by the Enterprise in the Market Survey Investment Capital Cash / Retained Earnings Bank Loan NGO Loan Money Lender Chit Fund/Beces Trade Loan Family / Friends Loan Grants/Gift from Family Sale of Family Items Cooperatives/Credit Societies NBFC Other Total Sample (n = 3,192) 70% 1% 0% 5% 1% 0% 15% 6% 2% 0% 0% 0% Source: India Market Research Survey, Table A7. Selected Indicators of the Relations between Entrepreneurs and Suppliers in the Market Enterprise Survey Purchases Raw Material/ Goods Avg. Value of Purchases Per Year (Rs) Avg. Growth for the Past Year (%) Total Sample (n= 3,192) 100% 123,281 (92,930) 18 10% (10%) Source: India Market Research Survey, Note: Values in parenthesis represent the medians. 33

36 Table A8. Selected Characteristics of the Trade Credit Relation (Credit Payment) between Entrepreneurs and Suppliers in the Enterprise Survey Entrepreneurs Using Cash Payment Avg. Percentage of Total Cash Purchases Entrepreneurs Using Supplier Credit Avg. Value of Transaction Avg. No. of Transactions/yr Entrepreneurs Using Advance Payment Avg. Percentage of Advance Payment Purchases Entrepreneurs Using Payment on Consignment Avg. Percentage of Purchases by Consignment Source: India Market Research Survey, Note: Values in parenthesis represent the medians. Total Sample (n= 3,192) 99% (n=3,179) 96% (100%) 11% (n=341) 3,515 (1,800) (25) 20 1% (n=16) 0.2% (0%) 0% 0% (0%) Table A9. Selected Indicators of the Relations between Entrepreneurs and Customers in the Market Survey Avg. Sales (Rs) Manufacture/Sell for Others Avg. Percentage of Sales with Respect to Manufacturing Form of Sale (payment) Cash Consignment Credit Advance Payment More than one Source: India Market Research Survey, Note: Values in parenthesis represent the medians. Total Sample (n= 3,192) 246,666 (210,000) 21 3% (n=93) 15% (10%) n = 3,192 85% 0% 0% 0% 15% Table A10. Selected Characteristics of the Trade Credit Relation (Advance Payment) between Entrepreneurs and Customers in the Market Survey Entrepreneurs Using Customer Advances Avg. Value of Transaction Avg. Number of Transactions/yr Avg. Percentage of Advance Entrepreneurs Selling Cash Avg. Percentage of Cash Sales Entrepreneurs Selling on Credit Avg. Percentage of Credit Sales Entrepreneurs Selling on Consignment Avg. Percentage of Consignment Sales Source: South Africa Market Research Survey, Note: Values in parenthesis represent the medians. Total Sample (n= 3,192) 1% (n=39) 4,162 (1,875) (60) 23 35% (25%) 99% (n=3,186) 96% (100%) 14% (n=436) 4% (0%) 1% (n=39) 1% (0%)

37 Table A11. Selected Indicators of Constraints and Problems Facing the Entrepreneurs in the Market Survey Most Significant Problem: Weak Demand Marketing & Distribution Labor Problems Raw Materials General Services Costly Financing Unavailability of Financing Sources Insufficient Collateral Domestic Competition Foreign Competition Taxation Law Government Procedures Customer Problems Technology & Equipment Supplier Problems Location Weak Surrounding Infrastructure Other Total Sample (n = 3,192) 24% 3% 6% 3% 4% 3% 8% 0% 23% 0% 1% 1% 15% 0% 1% 5% 2% 1% Second Most Significant Problem: Weak Demand Marketing & Distribution Labor Problems Raw Materials General Services Costly Financing Unavailability of Financing Sources Insufficient Collateral Domestic Competition Foreign Competition Taxation Law Government Procedures Customer Problems Technology & Equipment Supplier Problems Location Weak Surrounding Infrastructure Other Avg. Production Growth Compared to Last Year 6% 2% 3% 3% 3% 3% 3% 1% 20% 1% 1% 2% 20% 3% 4% 15% 5% 5% 10% (10%) Source: India Market Research Survey, Note: Values in parenthesis represent the medians. 35

38 Table A12. Selected Characteristics of the Informal Loans Economic Agents Use Ever Requested an Informal Loan Source of Loan Colleagues Friends Family Money Lender Others Ever Been Rejected an Informal Loan Used an Informal Loan in the Past Year Avg. Number of Informal Loans in the Past Year Source of Most Significant Loan in the Past Year Colleagues Friends Family Money Lender Others Characteristics of Past Year Loans Avg. Number of Days to Get Loan Avg. Value of Loan (Rs) Avg. Interest on Loans (Rs) Avg. Duration of Loan (Months) Avg. Value of Collateral as % of Loan Purpose of Informal Loan in the Past Year Business Home Improvement Home Purchase Personal Total Sample (n= 6,575) 99% (n=6,496) 9% 44% 23% 23% 1% n =6, % (n=25) 96% (n=6,309) 1 (1) n = 6,309 10% 44% 22% 23% 1% 6(3) 24 9,345 (5,000) (0) 26 8(5) 27 9 % (0%) 28 18% 7% 1% 74% Source: India Market Research Survey, Note: Values in parenthesis represent the medians.

39 Table A13. Selected Characteristics of Economic Agents Demand for Formal Loans Never Requested a Formal Loan Reason for Never Requesting a Loan: Lack of Collateral Lack of Financial Documents High Interest & Fees Difficult & Lengthy Procedures Availability of Other Sources of Finance Lack of Bank Relations Fear of Inability to Repay the Loan Religious Beliefs Other Requested a Formal Loan in the Past Request for Formal Loan Rejected Reason for Being Rejected Lack of Collateral Lack of Financial Documents Lack of Bank Relations Business not Registered Lack of Spouse s Approval Bad Credit history Other Requested and Did not Collect an Approved Formal Loan Reason for not Collecting an Approved Formal Loan Fear of Inability to Repay Other Credit more Preferable Others % of Total Sample (n= 6,575) 95% (n=6,247) 12% 22% 18% 23% 5% 8% 7% 1% 4% 5% (n = 328) 42% (n=138) 21% 49% 12% 7% 2% 4% 5% n = 328 7% (n=23) 57% 26% 17% Source: India Market Research Survey,

40 Table A14. Selected Characteristics of Formal Loans Economic Agents Used During Past 3 Years % of Total Sample (n= 6,575) Characteristics of Past Three Years Loans: Used a Formal Loan in the Past Three Years Avg. Number of Loans in Past Three Years Repaying a Loan Type of Loans in the Past Three Years Working Capital Loan Fixed Assets Loan Consumption Loan Home Improvement Loan Mortgage Loan Avg. Number of Days to Get Loan Avg. Value of Loan (Rs) Avg. Interest and Fee Charges (%) Avg. Value of Installment (Rs) Avg. Term of Loan (months) Avg. Value of Collateral as % of Loan Type of Collateral Provided: Building Land Machinery Inventory Bank Account Guarantor Business License No Collateral Other Avg. Percentage of Formal Loan Used for Housing 2.4% (n=163) 1 (1) 87% (n=143) n = % 15% 23% 28% 10% 28 (20) ,242 (70,000) % (9%) 31 2,596 (2,200) (36) 33 83% (100%) 34 23% 15% 1% 2% 22% 15% 3% 9% 9% n = 80 87% (100%) Source: India Market Research Survey, Note: Values in parenthesis represent the medians.

41 Table A15. Saving and Alternative Financial Channels Reported in the Market Survey Economic Agents Holding Deposits in Formal Institutions Avg. Number of Current Accounts % of Total Sample (n= 6,575) 68% (n=4,475) 1 (1) Source: India Market Research Survey, Note: Values in parenthesis represent the medians. Table A16. Participation in Informal Groups Reported in the Market Survey Participation in Informal Groups (Chit Groups/Beces) Avg. Number of Groups Participating in Avg. Number of Members Avg. Number of Women Members Avg. Duration of Group Avg. Number of Contributions per Month Avg. Size of Contribution Informal Collectors Saving with Collectors Avg. Size of Deposit Last Year Remittances Receiving Remittances Avg. Size of Remittances Last Year (Rs) Transfer Making Money Transfers Receiving Money Transfers Source: India Market Research Survey, Note: Values in parenthesis represent the medians. % of Total Sample (n= 6,575) 23% (n=1533) 1 (1) 20 (20) 8 (7) 23 (20) 1 (1) 768 (500) 35 n = 6,575 11% (n=734) 11,424 (6,000) 36 n = 6, % (n=6) 32,166 (26,000) 37 n = 6,575 7% (n=430) 1% (n=67) 39

42 Table A17. Potential Demand for Individual Formal Loans by the Economic Agents in the Survey Potential Demand for Individual Loans Type of Loan: Business Loan Personal Loan Housing Loan Potential Demand for Business Loans Avg. Term of Loan (months) Avg. Value of Loan (Rs) Potential Demand for Personal Loans Avg. Term of Loan (months) Avg. Value of Loan (Rs) Potential Demand for Housing Loans Avg. Value of Installment (Rs) Avg. Value of Loan (Rs) Avg. Interest Charges (%) Avg. Fee Charges (%) Avg. Term of Loan (months) Housing Loan Use Construction Material Home Improvement Mortgage Type of Collateral Available Building Land Machinery Salary Bank Accounts Household Furniture Jewelry Guarantor No Collateral Available Source: India Market Research Survey, Note: Values in parenthesis represent the medians. Total Sample (n= 6,575) 64% (n=4,219) 54% (n=2,298) 22% (n=909) 28% (n=1,186) n = 2, (36) 38 62,849 (50,000) 39 n = (30) 40 38,828 (25,000) 41 n = 1,186 1,944 (1,900) ,113 (100,000) 43 7% (6%) 1% (1%) 76 (60) 44 22% 45% 33% n = 4,219 23% 3% 2% 4% 18% 0% 4% 29% 17%

43 Table A18. Selected Characteristics of the Homes Reported in the Survey Avg. Number of Inhabitants in the House Avg. Number of Rooms in the House Type of Home Independent House Apartment in a Building Row House Attached Room in a Building Hut Type of Roof Concrete Wood Plant Material Tin/GC Fabric Other Total Sample (n=6,575) 4 (4) 2 (2) 48% 7% 32% 7% 6% 67% 0% 4% 27% 0% 2% Kitchen Inside Home Outside Home Bathroom Inside Home Outside Home 86% 14% 74% 26% Floor Concrete Wood Tile, Fabric, Blocks Dirt/Earth 14% 84% 1% 1% Water Public or Private Water Line Connection Water Tank or Well Connection No Connection Purchased Source (bottled water) Electricity Formal Power Line Connection Informal Power Line Connection No Electricity 82% 5% 13% 0% 95% 4% 1% Source: India Market Research Survey, 2007 Note: Values in parenthesis represent the medians. 41

44 Table A19. Selected Characteristics of the Home Reported in the Survey Have Undertaken a Home Improvement in the Past 5 Years Type of Improvement Additional Room Additional Apartment Additional Room for Business Building a Kitchen Building a Bathroom Fixing the Ceiling Fixing the Flagstones Painting Windows Doors Connecting to Outside Water Line Internal Water Installation Connection to Outside Power Line Internal Electricity Installation Home Registration Avg. Cost of Construction (R) Source of Funds Savings Informal Loan Formal Loan Family Help Execution Method of Home Improvement Self-Built Hired Builder Government / NGO Other Total Sample (n= 6,575) 55% (n=3,626) 8% 4% 4% 9% 12% 17% 21% 90% 19% 18% 5% 7% 4% 6% 4% 13,302 (5,000) 45 82% 11% 1% 6% 38% 60% 0% 2% Source: South Africa Market Research Survey, Note: Values in parenthesis represent the medians.

45 Table A20. Selected Characteristics of the Potential Owners New Housing Demand Reported in the Market Survey Willing to Move/Construct a New House Avg. Cost of New House Structure of New House Detached House Flat/Apartment Row House Attached Room in a Building Hut Sources of Funds for New House Selling Current House Informal Loan Formal Loan Gift Government Subsidy Personal Cash Total Sample (n= 3,222) 9.6% (n=308) 487,970 (450,000) 46 31% 19% 25% 24% 1% 37% 6% 44% 0% 3% 10% Source: India Market Research Survey, Note: Values in parenthesis represent the medians. 43

46 Table A21. Selected Characteristics of the Potential Owners Home Improvement Projects Reported in the Market Survey Total Sample (n= 3,222) Willing to Undertake Improvement Additional Room Additional Apartment Additional Room for Business Building a Kitchen Building a Bathroom Fixing the Ceiling Fixing the Floors Painting Windows Doors Connecting to Outside Water Line Internal Water Installation Connecting to Outside Power Line Electricity Installation Home Registration Avg. Cost of Improvement (Rs) Avg. Savings Available for Home Improvement Ability to Complete Improvement Without Labor Sources of Funds for Improvement Informal Loan Formal Loan Gifts Government Subsidy Personal Cash Acquisition of Material Avg. Value of Installment to Repay Home Improvement Loan (Rs) 62% (n=2,004) 13% 7% 6% 18% 19% 18% 22% 85% 24% 21% 4% 6% 2% 5% 3% 25,668 (10,000) 47 11,619 (5,000) 48 22% 8% 21% 0% 1% 70% 0% (n = 577) 1,117 (1,000) 49 Source: India Market Research Survey, Note: Values in parenthesis represent the medians.

47 Table A22. Selected Characteristics of the Potential Non-Owners New Housing Demand Reported in the Market Survey Willing to Build/Purchase a New House Own Land for Building New House Willing to Purchase Land Sources of Funds for Acquiring Land Purchase Informally Purchase Formally Gift Government Subsidy Acquire Informally Not Affordable Avg. Cost of Land Sources of Funds for New House Informal Loan Formal Loan Gift Government Subsidy Personal Cash Acquisition of Material Avg. Cost for Building / Buying House Structure of New House Detached House Flat/Apartment Row House Attached Room in a Building Hut Ability to Build the House Without Labor Total Sample (n= 3,353) 26% (n=881) 12% (n=109) 80% (n=707) 18% 49% 2% 27% 2% 2% (n=29) n = ,131 (150,000) 50 n = % 54% 1% 18% 14% 1% 237,985 (200,000) 51 73% 6% 13% 6% 2% 8% Source: India Market Research Survey, Note: Values in parenthesis represent the medians. 45

48