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EXCLUSIVE: ‘Daring to Dream’ – Swati Sanyal Tarafdar in ‘The Fintech Magazine’

A new breed of fintech is transforming lives in India by turning the traditional education lending market on its head and releasing millions of dollars to students who’d never otherwise have been able to study. Swati Sanyal Tarafdar talks to the entrepreneurs driving change – and one of the students to benefit from it

To jumpstart her career in management accountancy, 35-year-old Aanchal Mahapatra finally enrolled for a specialised international course in 2020. She had been wanting to do so for several years but her financial responsibilities and the meagre salary in her job at a textile firm, were hindering her dreams. As the pandemic hit India in March 2020, and work from home became the norm, Mahapatra found time to reflect on what she was doing with her life. The current job was also hanging by a thread, forcing her to make some tough decisions.

As she explored options for financial help – because the two-year course cost half her annual salary – she came across a digital lendtech that offered short-term and unsecured educational or upskilling loans.

“I was in two minds. I have seen how tough it was for my cousin, a meritorious student from one of the premier engineering institutes in India, to secure a loan from an Indian PSU [a public sector undertaking, wholly or partially owned by government] around 10 years ago,” Mahapatra says, recalling how stressful it was to queue up in the banks and various government offices for days to obtain necessary documents and to understand the various terms and conditions set out.

“I always accompanied my cousin and uncle on these trips. They didn’t feel good. Somewhere inside, we felt a loss of dignity,” she adds. “Fortunately, my cousin’s father had their own house to offer as a moratorium. I still don’t have that.”

That experience had led Mahapatra to sacrifice her hopes for a higher education, and saw her enter the job market instead.

“Big dreams were not for people like us,” she tells me. But now she began to think again.

“Loans are a scary subject in Indian middle-class households. We often need them, and we often fall victims to them,” she says, referring to hidden and exploitative terms and high and informal rates of interests. But these new lendtechs seemed upfront and friendly. Moreover, they often came through the institutes offering the courses, and that gave her confidence and made the application process easier.

“They didn’t ask for any out-of-the-way or difficult documentations – in fact, once I had managed to get the papers scanned and digitised, my loan application was done within 10 minutes,” Mahapatra adds.

The repayment amounts are variable, and are based on a current income and potential future income formula.

“Repayment started after four months. Initial sums were smaller, and they would go up once I finish the course, on the assumption that, by then, I’ll manage to secure a higher-paying job,” Mahapatra explains. “It still gives me chills, but I am able to manage my finances a lot better now.”

She has little to worry about, because, with her newly acquired skills and armed with a potential higher education accreditation, Mahapatra is already appearing for virtual interviews with multinational companies that promise better pay packages.

The traditional education loan scenario in India

According to the All India Survey on Higher Education (AISHE) 2019-20 report, published in June 2021, the gross enrolment ratio (GER) in higher education in India is 27.1 per cent. The GER is the ratio of enrolment of people in higher education in relation to the population at large in the eligible age group, which is 18-23, in India. Corresponding global rates range from around eight per cent in sub-Saharan Africa to 75 per cent in Europe and North America.

The education finance scenario in India is primarily driven by the socio-economic profile of students and their cost of education. Private education, and technical, professional and vocational courses are usually expensive and require external financing. Traditionally, Indians recoursed to public sector banks (PSBs) for financing higher education – PSBs had been responsible for almost 95 per cent of the education loans.

The other common financing options were direct student loans from non-banking financial institutions or informal sources, such as borrowing from friends and relatives, credit card borrowings, and secured loans against properties. Over the years, however, PSBs started to shrink away from small-sized education loans, as these unsecured loans with no moratorium attached to them were the ones people mostly defaulted on. Borrowers used these smaller loan packages to cover basic education, such as graduation courses (10+2+2 or 3 years in college), which had lower employment opportunities. No doubt these were pushing banks into an unending spiral of non-performing assets.

After 2010, as the fintech waves started settling down in India and the start-up scene began to show promise, tech-leaders identified this hugely untapped segment of lower loan packages for education and upskilling, and started working towards filling it through creative ways that might suit the domestic education market.

“We were surprised by the huge gap in the domestic education finance market in India,” says Victor Senapaty, co-founder of Propelld, an Indian ed-fintech focussed on supplying the entire domestic education market with highly customisable products.

“Finance penetration in the domestic education segment was hardly at the two to three per cent level, whereas, in developed countries like the US or UK, it was at 60-70 per cent or even higher. We believe that financing is a tool that can enable any ecosystem, so we focussed on the domestic education market.”

Many more creative solutions started cropping up – some worked as marketplaces and some as aggregators. What followed soon was a paradigm shift in the way lending for education was viewed. A new breed of ed-fintech companies with an empathetic approach to lending started to emerge.

“When we launched in 2015, our objective was really to help students find the right source of funding. Initially, we just listed different scholarships on our website, and we continue to do so, hoping some students might obtain meaningful amounts,” explains

Ankit Mehra, co-founder and CEO of GyanDhan, which calls itself India’s first-ever education financing marketplace for both the domestic education segment as well as those opting to study abroad. The domestic offer specifically caters to finance upskilling and vocational programmes, or specialised coaching programmes for competitive exams. These are relatively shorter programmes with a clear outcome. The loan sizes vary from INR 20,000 (around £200) to four lakhs (£4,000). Typically, repayment time for these loans are one to one and a half years.

For these loan parcels, GyanDhan, a nonbanking financial company, works as a lender itself, and earns from the processing fee, and sometimes interest on the loans. What these new-age ed-fintech have broken here is the link to any moratorium.

“If you go to the right school with the right credentials, then you can get loans without collateral as well at this point in time,” say Mehra. “What has continuously been overlooked is the income-earning potential of the candidate themselves. That is the key factor we’re looking at, alongside what their current salary levels are, what their current obligations are, what their repayment history has been like.

“But the one big difference for us is actively trying to understand whether this course will materially change the borrowers’ income-earning potential and when will they be in a position to repay this debt?” says Mehra.

This change of outlook has resulted in both a market expansion as well as a changing demographic in terms of the economic profiles of the candidates choosing to get skilled or educated. Often these loans are divided into phases or spread across semesters, and the assurance of a future loan depends on the borrowers’ performance at class plus repayment behaviour – ensures a higher rate of success for all concerned.

When it comes to funding study abroad, GyanDhan funds students going into higher education. The average loan size is INR 30 lakhs (£30,000) and repayment is over a period of seven to 15 years. For these high-end products, GyanDhan acts as the bridge between individual clients with established banks who provide secured loans against a moratorium.

“Customers come to us for these because of the convenience we offer. Even if they are not eligible for a loan, at least they’ll get the answer immediately,” says Mehra.

Then there’s the clarity on the product itself. “Your experience could vary significantly, over years, across banks. For us, our customers are the whole focus. We understand the product, the need of the customers, and match them accurately.”

Historically, in India there have been challenges to do with communication around financial products. By tying up with PSBs, Mehra says GyanDhan smooths out all the friction points. “We look at the analytics and say, what can be improved from an operations standpoint?”

While digital-first, it collects necessary documentation from the end-clients’ doorsteps, and that makes a huge difference.

A paradigm shift in approach

“The traditional way in which a banking system looks at a client is as a bank statement – or their parents’ bank statements – in order to assess their ability to pay back a loan,” agrees Senapaty. “They’ll look at particular collaterals. But we are looking at our clients from a different lens – as someone building their capacities and skills to increase their worth. And, if financing them involves risk, can we distribute the risk if we work along with the institute with which our clients are working?”

If an educational institute promises potential clients a job after the completion of a certain course, these new ed-fintech companies make them put their money where their mouths are.

“The individual may not have the current balance sheet to support a loan today, but, if the Institute is promising a secure job after the candidate attends its courses, the clients will have a higher return in future,” reasons Senapaty. “This also means that the risk is divided. The placement risk is with the Institute, contractually. If the Institute fails to secure my client a job, the institute should repay me the loan.”

Similarly, Mehra adds: “In the domestic space, we operate a B2B model. We don’t accept applications from individual customers. We first onboard specific training institutes. Students admitted to these training institutes apply either directly to our website or through that partner.”

One of the main challenges ed-fintechs faced initially was convincing educational institutes to partner with them.

“It took a lot,” says Senapaty. “The entire education ecosystem had been overlooked in terms of adequate financing and the education institutes have faced a lot of challenges. The traditional financial system has not been helpful for them. So, when a young start-up says that I’m going to solve your problem, they’re going to be sceptical.”

But, he argues, the result is an improved conversion rate of applicant to student for the institutes, while the cost of conversion also decreases. Their go-to-market strategy becomes better, and they can now think of investing in the quality of their courses rather than focus on receivables, cash flow management, etc.

“Overall, it becomes a structure where every stakeholder has some skin in the game, and it’s a win-win for everyone” says Senapaty. “That was the intent and that’s how we started building the product. But it takes a lot of tech capability.”

Unlike GyanDhan, Propelld focusses purely on the domestic education market. Every segment has a different level of risk and requires bespoke products accordingly. But, having delivered results for their partners, Senapaty says Propelld is now seeing more educational institutes approaching it, asking to collaborate. The use of technology has accelerated a mindset change, post-COVID, but what’s really driving these new partnerships is improved cashflow management and the ease of doing business for the educational organisations, he says.

“The effort of enrolling a student is far less onerous now because they can offer reliable finance solutions for the students at the same time as they offer admission – that’s made it easier for the educational institutes to trust the new system.”

A new niche vertical

Essentially, this new generation of edu-fintech offers finance solutions that were mostly absent for Indian students and mid-career professionals looking to upskill. What was earlier ‘financial support for the meritorious’ became ‘finance for anyone with a promising future’, defined as a new job or better role, while tangible assets and parents’ payslips stopped becoming the criteria for loans.

And, the really big difference, Mehra explains, is that they are zero interest loans.

“If you buy a mobile on Amazon now, you can pay INR 30,000 by cash upfront, or you can convert it into instalments of INR 5,000 payments for each of six months. That’s exactly how it works in the domestic sales space for most of our loans,” he says. The companies get their revenue from the institutes. So, the end consumer is better off than if they had applied for a personal loan to take the course.

Demand for education loans in India rose exponentially in 2020 as the population focussed on skills development and increasing capabilities during an uncertain year. Education loan companies, including banks and non-bank lenders, had disbursed INR 11,000 crore (GBP £10,91,345) in loans by September 2020 and more than 3,00,000 new borrowers had signed up, according to data from CRIF High Mark, a credit bureau. Helping to drive that demand were new-age edu-fintech companies, acting as the bridge between willing students and educational institutions.

So, now it is possible for people like Aanchal Mahapatra to dream of a secure, better future.

A global opportunity

The US Federal Reserve estimated that in quarter three of 2020, student loans exceeded $1.7trillion, showing an increase of nearly four per cent, compared to quarter three of 2019. In 2020, 55 per cent of bachelor degree recipients took student loans, graduating with an average of $28,400 in federal and private debt. About 14 per cent of parents with students in the class of 2019 took an average of $37,200 in federal loans.

Covid certainly was responsible for a part of this but data shows student debts have been on the rise in the US for decades. It increased by approximately 102 per cent between 2010 and 2020. Noticing this trend, fintech companies, like Sofi, were quick to innovate, creating new ways to service the education loan segment in the US. Sofi itself recognises that ‘getting your money right’ means different things to different people. While for some, it means being debt free, for others, it means being able to buy a home. And this sharp customer focus, is its. Sofi’s success in particular means there is now a multitude of companies financing education loans in the US in creative ways.

In Asia, it’s recognised that education can empower and transform lives, especially those in the lowest income households, who are also least able to pay. Schools struggle with cash management issues there, too, and lendtechs are bridging these gaps. In Indonesia, for example, cost of higher education reaches up to US $5,000 a year, while the average Indonesian family earns just US 2,700 a year, which goes a long way to explain why enrolment rate falls from 97.2 per cent at elementary school to 31 per cent at university level.

“For a family in India, education is the second largest expense, after health and nutrition. There’s still return on investment (ROI) – if not in six months or a year, then in the long term, although it might be difficult to measure,” says

Senapaty, who says companies have historically been put off investing in the segment because of the poor ability of families to pay. And yet, demand for education loans in India rose exponentially in 2020 as the population focussed on skills development and increasing capabilities during a largely uncertain year. Education loan companies, including banks and non-bank lenders, had disbursed INR 11,000 crore (GBP £10,91,345) in loans by September 2020 and more than 3,00,000 new borrowers had signed up, according to data from CRIF High Mark, a credit bureau. And, helping to drive that demand were new-age edutech companies, acting as the bridge between willing students and educational institutions. So, now it is possible for people like Aanchal Mahapatra to dream of a secure, better future.


 

This article was published in The Fintech Magazine #24, Page 18-19

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