Financial Services
Unlocking Growth in the Affordable Housing Finance Market
15 Jan 2025
India's affordable housing sector is crucial in addressing the housing deficit, particularly for economically weaker sections (EWS) and lower-income groups (LIG). The government defines affordable housing based on price and size limits, which differ between metropolitan and non-metropolitan areas. These efforts aim to provide accessible and sustainable housing options, ensuring homeownership for key population segments and supporting broader market growth.

Affordable housing:
 The government of India defines affordable housing as price <=US$ 4.5M and carpet area of <= 60 square meters in metropolitan areas and <= US$ 4.5M and carpet area of <=90 square meters in non-metropolitan areas.

Affordable housing finance (AHF): As the property value of affordable housing is <=US$ 4.5M and the loan-to-value (LTV) observed for this industry is ~55%, hence players with average ticket size <= US$ 2.5M are considered affordable housing finance companies. 

AHF market plays a crucial role in addressing India’s housing deficit of ~100M units, particularly for Economically Weaker Sections (EWS) and Lower Income Groups (LIG) segments. It supports the growing demand for affordable housing, driven by urbanization, increased income levels, and government initiatives like Pradhan Mantri Awas Yojana (PMAY). 

AHF market: The overall affordable housing finance market stands at US$ 10.7 T as of FY24, constituting around 33% of the overall housing finance market. Public Sector Banks (PSBs) dominate the segment with a market share of approximately 45%, followed by Housing Finance Companies (HFCs) at 27% and Private banks at 24%. Even though the share of PSBs is the highest, HFCs and private banks’ AHF AuM have been increasing with a higher CAGR than PSBs.

The affordable housing finance market in India is highly fragmented, comprising public and private sector banks, regional rural banks, non-banking financial companies (NBFCs), and specialized HFCs. This diverse mix caters to varied borrower needs, with players focusing on small-ticket loans and leveraging technology to reach underserved markets.

Affordable housing finance is an incredibly attractive market

1. Increasing market size: 

  • The affordable housing finance AuM has steadily grown at 6%, reaching US$ 10.7T in FY24
  • Between fiscals 2019 and 2024, the segment recorded a CAGR of 5.9%, which trails the overall housing loans market growth of 13.1% during the same period  
  •  Looking forward, the market is projected to grow at an 8-10% CAGR between FY24-27, with an estimated market size of US$ 14.1T by FY27.

2. Untapped customer demand:

  • According to the RBI report by the committee on housing finance securitization market development, India's housing shortage in 2022 was expected to be ~100M houses with EWS and LIG segments accounting for 95% of the total shortage
  • Lending institutions in the affordable housing segment have developed unique strategies to serve underserved customer categories in low to mid-income groups across various employment segments – including salaried professionals, informal sector workers, and self-employed individuals running small businesses.
3. Favorable government institutions: 
  • PMAY - Urban: The scheme helps drive housing finance demand by increasing homeownership aspirations through interest subsidies, reducing borrowing costs, and targeting underserved segments. Further, PMAY 2.0 has reduced the maximum interest subsidy from US$ 2.5M to US$ 1.8M spread over 5 years with increased focus on inclusivity 
  • PMAY - Grameen: The scheme is for the rural population who don't have their own houses. It provides financial assistance and interest rate subsidy 
  • The relaxed External Commercial Borrowing (ECB) guidelines will enable easier access to overseas funds, enabling companies to secure funding at more favorable rates than domestic borrowing
  • GST rates for affordable housing finance were cut down to 1% making affordable housing more accessible to buyers.

4. Profitability for lending institutions:
  • AHFCs enjoy pricing power as they operate in a higher risk segment compared to banks / traditional HFCs because of the customer profile (informal salaried/self-employed with low formal documentation) and their property type (outside municipal limits)
  • Private sector banks have had the highest asset quality among the lenders in the affordable housing space followed by public sector banks as of FY24
  • Institutions with lower Gross Non-Performing Assets (GNPA) exhibit a stronger foothold in Tier 2 and Tier 2+ cities, reflecting a prudent approach to risk and market selection
  • Housing finance companies operating in this space have witnessed a notable improvement in financial metrics from FY20-24. Their Net Interest Margins (NIMs) escalated from 3.5% in FY20 to 4.9% in FY24. Simultaneously HFC’s experienced a reduction in credit costs from 0.9% to 0.4% during the same period
Key success factors


1. Customer and market strategy

  • Micro-market focus: Successful companies focus on a few geographies where they have a good understanding of the local market dynamics. Gradually scaling from these areas allows companies to develop a strong presence before expanding
  • Customer segmentation: Focusing on underserved segments like EWS (Economically Weaker Sections) and LIG (Low-Income Groups) with tailored loan products is critical. Institutions need to specifically cater to salaried professionals, informal sector workers and self-employed individuals to capture the growing demand in affordable housing
  • Flexible loan products: Offering flexible repayment options like step-up or balloon repayment structures, which align with the income patterns of informal sector workers, enhances accessibility and affordability for borrowers.
2. Operational efficiency and cost management
  • Cost-effective distribution channels: The "hub and spoke" distribution model, with urban branches supported by small kiosks or mobile units in rural/semi-urban areas, ensures low operational costs while reaching a wide customer base
  • Technology integration: Leveraging digital platforms, including IndiaStack (eKYC, Aadhaar) and using AI-driven credit scoring models enables quick customer onboarding, faster loan approvals and improved operational efficiency
  • Efficient collections mechanisms: Implementing tech-enabled collection systems that track customer behaviour and use early warning systems helps reduce delinquencies. Encouraging customers to make payments through electronic methods (ECS) ensures timely repayment

3. Risk management and financial performance 
  • Innovative credit underwriting: Using innovative approaches to credit assessment that includes affluence scores, pincode mapping, analyzing cash flows (rather than just formal documentation), and using surrogate assessments for informal sector borrowers minimizes risk and enhances portfolio quality
  • Profitability through risk segmentation: Operating in higher-risk segments often allows for premium pricing, but companies need to balance this with strategic risk segmentation to maintain profitability. Focusing on lower-risk markets, such as Tier 2 and Tier 3 cities, can provide long-term growth and profitability
  • Asset quality maintenance: Maintaining low Gross Non-Performing Assets (GNPA) by focusing on prudent lending and effective collections is essential for long-term financial success


4. Regulatory alignment and strategic initiatives
  • Government scheme leverage: Leveraging government initiatives, such as PMAY, helps reduce borrowing costs for customers and makes affordable housing more accessible. These schemes offer interest subsidies, making homeownership more affordable for low- and middle-income groups
  • Co-lending and partnerships: Establishing co-lending arrangements with public sector banks, NBFCs, and HFCs allows for more efficient capital allocation and extends credit access to a broader audience. Such partnerships also help mitigate risk while improving loan origination
  • Regulatory compliance and innovations: Staying compliant with evolving regulations, such as external commercial borrowing (ECB) guidelines and the SARFAESI Act for faster recovery, helps maintain a smooth operational flow. Utilizing regulatory incentives optimizes the overall cost of borrowing


The affordable housing finance market is undergoing significant transformation, fuelled by growing homeownership aspirations and proactive regulatory support. With an increasing focus on underserved segments and innovations in operational models, the sector is steadily advancing toward inclusivity. As stakeholders continue to refine strategies to balance growth with sustainability, the market is poised to play a pivotal role in addressing India's housing needs effectively.

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