Affordable housing finance: Addressing the last-mile challenge

• by Shubha Bhanu and Rachit Tripathi
• Aug 3, 2026
• 7 min

India’s affordable housing challenge extends beyond building homes. Low- and moderate-income families continue to face income, documentation, and credit barriers. Affordable and customer-centric housing finance can help overcome these challenges and support secure and sustainable homeownership.

India’s affordable housing challenge is often measured by the number of homes built or sanctioned. While these metrics matter, they reveal only part of the story. The more fundamental question is whether households can access formal finance to build, purchase, or improve their homes. For millions of low- and moderate-income (LMI) families, the challenge extends beyond housing availability. They also need affordable, adequate, and timely housing finance. 

Financial institutions generally consider housing loans among the safest lending products because tangible collateral backs them, and delinquency rates have remained relatively low. Affordable housing finance (AHF), however, presents a far more complex picture than conventional housing loans. Lenders must adopt a different approach for economically weaker sections (EWS) and lower-income group (LIG) households. Success depends not only on the underlying asset but also on a clear understanding of the borrower. Lenders must assess household income, seasonal income fluctuations, employment patterns, housing aspirations, social and economic constraints, financial behavior, and repayment capacity. These factors carry as much weight as product pricing and collateral when lenders design sustainable and affordable housing finance solutions. 

The need to expand access to AHF is especially important because India’s housing challenge remains significant. India’s Supreme Court recognizes access to safe and adequate housing as part of the fundamental right to life under Article 21 of the Constitution. The country continues to face a substantial urban housing deficit. Current projections estimate a shortage of 31.2 million units by 2030. Other methodologies estimate a deficit of 50 to 70 million units, as nearly 95% of this shortage affects EWS and LIG households.  

These families face housing constraints due to affordability issues and structural barriers that limit access to the formal financial system. Many earn irregular incomes through self-employment, casual labor, or informal occupations. Their incomes fluctuate across seasons, which makes conventional income assessment difficult. Many also lack clear property records, land titles, or income documentation. Limited or non-existent credit histories further reduce access to formal housing finance, even when households are both willing and able to repay. As a result, many households with genuine housing needs remain outside the reach of institutional finance. 

The evolution of India’s housing finance ecosystem partly explains this financing gap. Historically, India’s housing approach remained supply-driven and state-centric. After Independence, public agencies led housing construction, while housing finance and private sector participation received limited attention. During the liberalization era of the 1990s, housing finance companies emerged as specialized lenders and expanded housing credit. However, they primarily served middle- and upper-income households, namely prime and near-prime borrowers. These borrowers could easily provide formal income documentation, posed lower credit risk, and offered stronger commercial returns. As a result, many lower-income households continued to rely on informal borrowing, incremental self-construction, or delayed housing investments. 

Over the past decade, public policy has sought to address this imbalance. A major shift occurred in 2015 with the launch of the Pradhan Mantri Awas Yojana (PMAY). The program shifted government strategy from housing construction to a broader housing ecosystem. PMAY introduced demand-side support through the Credit-Linked Subsidy Scheme (CLSS), which enabled beneficiaries to access institutional finance with interest subsidies. The program also repositioned the government from a housing provider to an enabler of housing finance through subsidies and institutional support. 

The results have been significant. As per data from 2026, under PMAY-U and PMAY-U 2.0, 12.7 million houses have been sanctioned, while 12.0 million houses have been grounded for construction, and 9.86 million have been completed and delivered to beneficiaries. Under PMAY-Gramin Phase I and II, states have received allocations for 41.5 million houses, sanctioned 39.0 million, and completed 29.9 million. Regulatory reforms, including revisions to priority sector lending (PSL) norms, have also expanded eligibility for affordable housing loans. Yet, policy support alone cannot address the structural barriers that continue to exclude lower-income households from formal credit. 

Affordable housing has received greater policy attention, while revisions to PSL norms have expanded eligibility to reflect changing property prices across geographies. Together, these measures recognize that better housing outcomes require better access to housing finance. Yet, policy support alone cannot close the financing gap. Greater access to affordable housing finance requires solutions that address structural, behavioral, and documentation barriers, which continue to exclude many lower-income households from formal credit. 

The AHF ecosystem relies on a diverse mix of institutions. Public-sector banks account for nearly 46% of the market, followed by housing finance companies at 29% and private-sector banks at 22%. At the same time, specialized affordable housing finance companies (AHFCs) have emerged as an important segment. This shift reflects the growing demand for lenders that serve customers excluded from mainstream housing finance. 

However, greater market access requires more than conventional lending approaches. Affordable housing finance cannot rely solely on household income or collateral value. Lenders must also understand housing aspirations, affordability thresholds, financial behavior, property ownership patterns, documentation readiness, and the broader housing supply ecosystem. Traditional underwriting models often fail to assess borrowers with irregular, seasonal, or self-employment income. Street vendors, transport operators, artisans, contractors, shopkeepers, and other informal workers often demonstrate stable earning capacity over time. Yet, their cash flows rarely fit salary-based assessment models. Effective, affordable housing finance, therefore, requires lenders to complement collateral-based underwriting with cash flow assessments and a deeper understanding of household financial resilience. This approach supports prudent risk management and expands access for underserved segments. 

Documentation also presents a major challenge. Unclear property ownership records, incomplete 13-year title chain documents, procedural complexity, and lengthy verification processes prevent many creditworthy households from accessing formal housing finance. Greater credit access, therefore, requires better loan products, simpler customer journeys, streamlined documentation where feasible, and operational processes that reduce friction throughout the lending cycle. 

Affordable housing markets are also highly local. Housing demand, construction activity, income levels, employment patterns, housing loan penetration, and repayment capacity vary across districts and states. A market with a large housing shortage may not offer the strongest lending opportunity if household incomes remain unstable or local credit ecosystems lack maturity. In contrast, economically stronger regions may show lower unmet housing demand. Lenders must therefore balance housing need with credit opportunity and economic stability instead of relying on a single indicator. 

The decision to buy, construct, or extend a house is shaped by a complex interplay of household needs, aspirations, family dynamics, and financial capacity. Once this decision is made, households must determine how to finance, as housing finance is usually their largest lifetime investment. At this stage, understanding borrowers becomes equally important. Trust in financial institutions, awareness of formal financial products, confidence in their ability to repay, previous borrowing experiences, and intra-household decision-making all influence whether households seek formal finance, the type of financing they choose, and the terms they are willing to accept. Gender roles, social networks, interactions with intermediaries, and perceptions of lenders also influence borrowing behavior. Treating LMI households as a single customer segment overlooks these vital differences. Evidence-based product design should therefore combine quantitative market analysis with a qualitative understanding of customer behavior. Market size estimates, affordability analysis, demographic profiles, and housing demand projections provide a strong foundation for eligibility assessments. These insights become more valuable when lenders also understand borrower motivations, financial decision-making, documentation challenges, and local market conditions. Together, these perspectives support stronger product design, underwriting frameworks, operational processes, and customer engagement strategies. 

These complexities have reshaped credit assessment across the sector. AHFCs now use AI-powered analytics and alternative data sources to evaluate informal sector borrowers. Lenders assess utility payment records, mobile usage patterns, and social data to evaluate customers without traditional credit histories. This approach expands market reach while improving risk management in underserved segments. Market leaders also adopt hybrid “phygital” distribution models that combine digital capabilities with physical presence. They establish micro-branches in Tier-II and Tier-III cities to deepen market penetration while maintaining personal interactions. Physical presence remains essential for accurate credit assessment and relationship-building, where digital literacy and formal documentation are limited. This model allows lenders to scale without compromising underwriting quality. 

The implications of the affordable housing finance ecosystem extend beyond individual lenders. As India continues to urbanize and housing demand grows, financial institutions must adopt business models that balance commercial sustainability with a deeper understanding of customer realities. Products designed only around institutional processes may fail to serve households whose financial lives fall outside conventional lending models. In contrast, institutions that understand informal income patterns, housing journeys, local markets, and customer behavior are more likely to develop scalable and inclusive products. India’s affordable housing challenge also presents one of the country’s largest opportunities for financial inclusion.India’s affordable housing challenge extends beyond building more homes. It also requires households to access the finance needed to purchase, construct, or improve them. However, affordable housing finance requires more than sanctioning additional loans. It will succeed when formal finance reaches families historically excluded from the financial system and reflects the realities of their lives.  

Lenders must move beyond collateral and compliance and adopt evidence-based product design, customer-centric underwriting, and operational models that reflect the realities of LMI households. Such an approach enables affordable housing finance to bridge the gap between housing need and home ownership while ensuring commercial viability and social meaningfulness.