Unconventional Leadership, Customer-Centric Approach: Inside Vastu Housing Finance's Journey To Success
Vastu Housing Finance, cofounded in 2015 by Sandeep Menon, has filled a vacuum in the affordable housing finance sector that large banks could not.
Covid-19 dealt a particularly severe blow to Asha Devi* and her three children who live in Haryana's Yamunanagar, bordering Uttarakhand. The widow of a non-commissioned army officer, she was eking out a living by cooking for college canteens in the neighbourhood and supplying food to a handful of students who lived in the vicinity. Living in a tiny, cramped space since the death of her husband, her ambition was to somehow buy a pucca roof over their heads in a colony where her teenage daughter would be safer. Just before Covid hit, she had managed to do this for Rs 22 lakh, with a home finance loan for Rs 12.5 lakh from Vastu Housing Finance.
But the pandemic struck a severe blow to all her plans. Not only did all college canteens and dorms empty out, but the students to whom she supplied food also vacated their rooms and left for home wherever possible. Her tiny enterprise came to a grinding halt and for a while, she stared at a very bleak future.
But as one of her businesses came to a halt, she began to supply high-quality vegetables through her network to homes and continued to provide a dabba service to her dwindling customers without giving up her house, which she'd bought in resale. She sought a moratorium on payments for a bit from Vastu but as soon as she could, she started paying her Rs 18,000 odd EMI on time.
Asha Devi has not only managed but has since grown her business and income substantially as she spends long hours at work, secure in the knowledge that her children are safer and can focus on their studies in a better space.
Equally inspiring is the story of Akhtar Ahmed*, a luxury bus ticket sales agent in Delhi's Azadpur Mandi area. His income hit zero as soon as travel came to a halt and he was faced with the prospect of forfeiting his house in the area bought with a loan of Rs 12 lakh from Vastu Housing Finance.
Ahmed sought a moratorium and then hit upon an idea to buy an LCV (light commercial vehicle) to ferry intra-city parcels, which comprised 40% of his bookings on buses. In addition to parcels, his younger brother and he also started supplying vegetables to households during the pandemic. Now, he has over four LCVs and has moved away from bus ticket sales and is not only paying his instalments but also considering taking a higher loan for a bigger house.
Identifying The Gap In Affordable Housing Finance
It is these real-life instances of changed lives, resilience, hope and honest intent that keep Satish Nair, the group treasurer of Vastu, tethered to his job. An MBA in finance, Nair worked in the rating industry before switching over to Vastu, one of the businesses he'd rated himself and was familiar with. Nair has been on his toes since the pandemic as many of their customers struggled with repayments. But, he has come across many such genuine instances, those hit by the pandemic, willing to share their troubles openly and seek solutions. Unlike what one sees in other segments, the lot he deals with have "pure intentions" and are willing to take their problems head-on seeking no shortcuts or jugaad. This has been reflected in a lower gross non-performing asset (GNPA as a percent of assets under management) of 0.88% for FY 2023, down from 1.14% in the preceding FY.
People like Asha Devi and Akhtar Ahmed have been the wind behind the sails of Vastu Housing Finance, one of the fastest growing affordable housing finance companies in India currently. The company, co-founded by Sandeep Menon, who had worked with GE Capital and a clutch of banks in 2015 building large retail businesses, identified the gap in affordable housing finance which the large banks were unable to fill. During this time, Multiples PE, led by Renuka Ramnath, along with Asha Impact's Pramod Bhasin and Vikram Gandhi, came together with Vastu, raising Rs 50 crore. Menon, however, owns less than one percent of the stake in the company, which he and the shareholders are keen to build as an "institution" with minimal leeway to individual ambitions and influence. Institutions, he argues, work and function regardless of who built them or drove them at inception.
A few tenets to chart their course was clear from the word go. Instead of just focusing on financing loans, Vastu was created with the express intention of financing self-construction and resale. The idea was to focus on the self-employed in Tier 2 and 3 cities who fall out of the radar of large banks and institutions and constitute a hugely unpenetrated segment. It was also evident that India was trailing behind even countries like Thailand, and Vietnam which have a mortgage penetration upwards of 40% whereas India is far below at 10-11%.
Typically, Vastu customers fall in the Rs 3-4 to Rs 10-12 lakh per annum income bracket. Its two main listed competitors are Aptus (South India focussed), and Avaas (North India focussed) and on a pan India basis, the leader is Aadhar Housing Finance which has a pan India presence, almost double in size and number of years in business and is expected to list soon.
What made the biggest difference to Vastu's plans was Aadhar and its spread. It acted as a "railroad" for the business to grow, as it provided a host of previously unavailable information. In the late 1990s and before 2010 or so, a lot of traditional lenders had tried to penetrate this market but with very little success as the operational risks were too high. "The small ticket size, the inaccessibility, the challenges of data, lack of information and the subsequently high operational risks always combined to ensure that any player in this space lost money. So what we had ironically was a late mover advantage", said Menon.
Learnings That Changed How Vastu Functions
In the last seven years, Menon has had a few key learnings that he feels changed the way they functioned and played a defining role in where they find themselves today.
One, the company decided to build its own data science, analytics and technology platform from scratch with the help of local engineers (as opposed to hiring expensive talent to do it or buying it from Infosys or other vendors). Building on top of existing and old technology, the team felt, makes it very "ungainly".
Pulse, their tech platform which captures every aspect of their business, was built with a scalable model at as low as 10-15% of the cost it would have entailed had they outsourced it. More recently, with the help of data science, it has been able to track delinquencies across markets, customers and even asset classes, which will help it lower risk further.
Unconventional Leadership
Two, a key differentiator for the business was its support of unusual horses. The company initially had teething troubles with its senior management who had conventional profiles with minimal adaptability. This did not go well, and Vastu eventually began to support young unconventional people in conventional roles.
For instance, instead of someone who has been a CFO at five businesses and has a standard profile, Vastu's CFO started with HDFC, UBS, and then some rating agencies before joining the company. Similarly, it chose someone from Amazon to lead its marketing, even though he may not have prior experience in the affordable housing business.
"We have decided to pick young, flexible talent with hunger rather than typical profiles with set ideas," said Menon. This, along with the expertise provided by Anita Ramachandran, founder of Cerebrus, and senior director Varda Pendse, has helped them build a team with high learnability. They also have guidance and insight from shareholders like Multiple's Renuka Ramnath and Pramod Bhasin who challenge the team at every step. Adaptability with a younger cohort of workers too has been key, said Menon: the days of punching cards might be over but one can expect better outcomes in delivery.
Customer Is King For Vastu
A third pillar for the Vastu team was making the customer central to its workings. "Often in under-penetrated segments, customers who have few options are last in line but we decided to buck this trend", said Menon. The company has stuck to this piece of advice given by ICICI Bank CEO Sandeep Bakhshi who maintains that one should not sell a product to a client or a customer that you would not sell to your own family.
While this key tenet has delivered, it has also revealed that not all markets are the same. What works in one state might not work in another. Menon cited the instance of Surat which was high on the radar of many housing finance firms but didn't work so well for Vastu since its timing of entry post-demonetisation backfired. The company did not manage to grow in the market as anticipated. He said one of his big learnings has been that no two markets in the country are identical. Timing the market and building capability before expanding can be the make or break.
Although Vastu seems set on its chartered path, the industry which functions in a larger macroeconomic environment has many variables and challenges. Avaishkaar's Anurag Aggarwal said that the affordable housing finance market is tougher with slower growth rates than microfinance as it requires double due diligence: of the income and the property titles. This adds to the time and cost for the lenders.
Second, the tenure of loans is longer - a minimum of 7 to 10 years - so it is riskier as one is betting on the income of the borrower to be stable and payments to accrue over a longer period than in microfinance. Moreover, the interest rates charged are lower than in MFI. But the asset quality, he argues, is usually more stable since a home loan is one of the last things someone will default on.
Dev Verma, co-founder, managing director and CEO of Swara Fincare Ltd, who worked 15 years in the NBFC and MFI industry before setting up his own company points out that land as collateral is trickier since legal enforcement of such collateral is not simple. Vastu maintains strict adherence to the regulatory guidelines in this regard and is not involved in land/plot purchase financing. Over 90% of the houses financed by Vastu are self occupied as residential properties (SORP).
In the last seven years since its inception, Vastu has grown its assets under management to Rs 6,500 crore, with a PAT of Rs 285 crore for the FY 2022-2023. What started as a small impact venture in 2015-16 now has developed into an organization with 3000 employees across 14 states in 190-odd market geographies which comprises around 80 percent of the mortgage pool in India. The bulk of the company's assets under management fall in five states: Rajasthan, Madhya Pradesh, Maharashtra, Karnataka and Telangana.
As it deepens its pan-India presence, the ability of Vastu to minimize its risks and lower its operational costs will be put to the test. As the team works to build what the founders call an "institution", the final proof of the pudding will be evident when the company lists, which it hopes to do in the not-too-distant future.
*Names have been changed to protect the identities of individuals.
