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Blockchain in Housing: Finance Industry

By Sharad Jambukar, CIO, Aadhar Housing Finance

Aadhar housing finance formerly known as DHFL Vysya Housing Finance is one of the largest affordable housing finance companies in India servicing the home financing needs of the low income sections of the society. Aadhar endeavours to empower underserved millions to own their first homes. Established in 2010, the firm have served more than 100,000 customers through 275 branches across the nation.

 

Financial services industry has been the highly growing industry across world. It has been core to the economy and lives of the people. Blockchain as technology has a bigger role to enhance overall quality of transactions in financial services. In current scenario, government and regulatory bodies are key influencer for financial services.

 

Affordable Housing Finance Sector:
Rapid urbanization and the lack of planned affordable housing in India have led to a shortage of 10–12 million urban homes and 26–37 million urban households residing in informal housing, often in poor living conditions. The bulk of these households are low-income—Economically Weaker Section (EWS) households, with annual incomes below 3 lakhs ($4,600), and Low Income Group (LIG) households with annual incomes of 3 lakhs to 6 lakhs ($4,600–$9,200). The bulk of low-income households work in the informal sector and do not possess reliable documentation of income. These households therefore cannot obtain housing loans from banks and traditional housing finance companies, which focus on middle- and high-income formal sector customers and provide loans on the basis of reliable income documentation.
A new group of “Affordable Housing Finance Companies” (AHFCs) is now addressing this gap and serving low-income, urban informal customers using an innovation pioneered in India—field-based credit assessment.

 

One of the challenges for AHFCs is the loss of good customers and consequential profitability. Once customers have a track record of regular payments, banks and larger HFCs are taking them over by providing loans at better rates and with “top-ups.” For some AHFCs, the annual outflow of such customers is as much as 18–24 percent.


Regulations do not allow pre-payment charges in India, so these “balance transfers” affect both the profitability of the AHFCs and the quality of the loan books (because they are losing some of their best customers), which in turn hurts their ability to improve their credit ratings and get lower-cost debt. This may lead to some AHFCs deprioritizing smaller customers since the cost of acquiring these customers is the same as the cost of acquiring larger customers, and in a short loan tenure regime, a larger customer is economically much more attractive.

 

Blockchain could help overcome this challenge by reducing the overall cost of the acquiring customer as well as speeding up the transaction time.

 

Possible Promise of Blockchain Technology:

Customer KYC for unbanked customers and simplifying property building and transaction through tokenization approach could be a great solution in this industry. Customer KYC solution has been much talked about and multiple approaches are available for financial services industry.

 

1. Customer KYC for Unbanked Profiles
Know Your Customer (KYC) processes provide the backbone of financial institutions' anti-money laundering efforts and help to detect and prevent criminal behaviors the world over. Despite the importance, KYC at many financial institutions is inefficient with tedious processes, duplication of effort and risk of error, which is costly and could negatively impact customer experience.

 

With the convergence of operational, regulatory, cost and customer experience challenges, it is clear that a change in KYC is needed. Technology may be the answer - but is blockchain the right solution?

 

The immutability and transparency of blockchain provides a streamlined way for financial institutions to gain swift and secure access to clean and up-to-date customer data. This results in greater operational efficiency, increased trust between institutions and reduction of labour intensive data gathering, processing time and costs.

 

For regulators, the use of blockchain provides a single source of customer data for better understanding and visibility of customer activity across financial institutions. From a customer standpoint, an institutions use of a blockchainenabled KYC utility could reduce on boarding wait times and eliminate the need to repeatedly provide the same information to their financial services providers.

 

2. House and Land Property Tokenization
Application of blockchain in real estate and simplifying the property could be a great innovation in this space.

 

In order to understand key aspects of property tokenization, it is essential to understand the basics of blockchain technology. At its core, blockchain is an ever-expanding decentralized public ledger. Individual blocks contain data, secured with cryptography that is impossible to change. Moreover, each block will have access to a cryptographic hash of the block prior to it. This includes a timestamp and transactional data. Having a publicly-accessible unchangeable ledger adds transparency to the real estate market.

 

Through smart contracts, a trust free position for buyer and seller can be established. In such a risky market where parties might not trust each other, smart contracts greatly reduce risk. Buyers and sellers can streamline the process of a property transaction thereby simplifying the contracting process for financing company as well.

 

Blockchains prevent any data manipulation once the information is on the distributed ledger. As a result, the technology records data permanently, efficiently, and transparently so that all parties involved can see the history of transactions.

 

Blockchain real estate startups tokenize an asset ensuring that sellers actually own the property and that the buyer has the funds to cover it through cryptographic smart contracts that is backed and participated with housing finance company. A blockchain can seamlessly verify all this data instantly, reducing the time and the total cost of the transaction.

 

Tokenizing a property into cryptocurrency increases the security and viability of the purchase, and opens up a global market. To many, blockchain technology has a clear application in the opaque real estate market. Several blockchain real estate startups have filled this niche by developing innovative solutions.

 

Acquiring customer would become easier with faster and secure KYC and loan disbursement with smart contracted property. This will not only help improve the profitability but also reduce the chances of frauds leading to NPAs.

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