Banks go by the book and don’t like lending to schools. A clutch of social investors is going beyond the book to help affordable private schools build quantity and quality.
In just a year, ISFC has disbursed Rs 4.9 crore to 60 schools in Hyderabad—an average loan amount of about Rs 8 lakh. By this year end, it wants to disburse Rs 20 crore to 300 schools.
Chief Executive Officer, Indian School Finance Company
"We take risks that financial lenders have been reluctant to take... And, there have been zero write-offs till date."
In late-2008, S Madhusudhan approached several banks for a loan to expand his school. They played hard to get. ISFC didn’t. In three months, the school had another four-storeyed building.
Principal and Correspondent, Pragati Vidyaniketan High School
"Banks have complex methodologies and take a long time on decisions. ISFC took less than a month to complete the loan formalities."
The Capability Builder
Gray Matters Capital, a non-profit outfit promoted by ISFC’s American parent, works with private schools in Hyderabad to improve their functioning in different areas.
Programme Officer (India), Gray Matters
"Micro-entrepreneurs can solve a lot of problems. They (affordable private schools) are doing it. Let us help them with resources."
M-Cril, the microfinance rating agency, rates each school. Lenders and parents can use the rating to assess a school; the school itself can use it to make a pitch for loans and students.
Managing Director, Micro-Credit Ratings International
"Rating is the only way to segregate education entrepreneurs. Some are serious, but some are there just to make money."
For the last 18 years, S MadhusudHan has been running a private school in Hyderabad’s Amberpet area. He’s shepherded Pragati Vidyaniketan High School from 35 students to 2,000, without any assistance from banks. In late-2008, he did approach several of them for a loan to expand the school, but they played hard to get. “They had complex methodologies and took a long time to take decisions,” says Madhusudhan, who is the Principal and Correspondent of Pragati Vidyaniketan. Eventually, all of them turned him down, citing insufficient documentation.
What they didn’t say is that Pragati Vidyaniketan, like most Indian schools, is run by a not-for-profit society—a profile banks don’t like lending to. Charitable trusts and not-for-profit societies are the preferred way to set up schools in India, as the inherent absence of the profit motive enables them to be recognised by the government.
But banks complain that by law and mindset, such trusts and societies enjoy a layer of social protection. So, if a school defaults, it’s not easy to attach its assets the way it is with companies or individuals. While rigid processes like these build walls between schools and banks, social investor David Kyle likes to smash them, and come to the heart of the matter: does the school have the ability to repay or not? If it does, Indian School Finance Company (ISFC), which Kyle heads, will lend it money, whether it is set up through a trust or not. The school-financing company loaned Pragati Vidyaniketan Rs 18 lakh, which the latter used to construct a new four-storeyed building. “It took less than a month to complete the loan-application formalities,” says Madhusudhan.
In just a year of operations, ISFC—a company promoted by Atlanta-based Gray Ghost Ventures—has disbursed Rs 4.9 crore to 60 schools in Hyderabad. That’s an average loan amount of about Rs 8 lakh. The promoter, in fact, funds social enterprises across the world. “We take risks that financial lenders have been reluctant to take. And, there have been zero write-offs till date,” says a visibly proud Kyle, as he fools around with the kids at Pragati Vidyaniketan. ISFC targets disbursing Rs 20 crore to 300 schools by December 2010.
While it pegs the minimum loan amount at Rs 5 lakh and operates largely in urban areas, another social investor, Kishore Kumar Puli is planning to go below and beyond. His microfinance company, Trident Microfin, is working on giving loans ranging from Rs 50,000 to Rs 5 lakh to educational institutions, primarily in rural areas. “It can be for building infrastructure or for working capital,” says Puli.
Five things differentiate social investors like Kyle and Puli from the formal lending sector. One, they firmly believe that private schools need to enrol more students in them. Two, they are not sticklers for processes like the others. Three, they lend money only to schools that practice affordable education. Four, they work with schools to utilise that money quickly and effectively. Five, along with quantity, they also strive to improve quality in these schools. Along with their partners, the likes of Kyle and Puli are quietly transforming the schooling ecosystem in Hyderabad.
‘A’ For Access
It was boredom and curiosity that made Kyle, the CEO of ISFC, think of financing schools. He had been visiting India since 2003. Kyle had been deputed by Acumen Fund, a New York-based social investing fund, to set up its operations in South Asia and Africa. In India, Acumen focused on funding and supporting social entrepreneurs in health, water and clean energy. “People (the end-users of Acumen ventures) used to ask me why we didn’t fund private enterprises in education,” says Kyle. “I had no answer.”
Years later, he did. By 2007, Kyle was getting bored at Acumen, and getting more and more interested in the colours, challenges and complexities of India. The same year, he quit Acumen and relocated to Hyderabad. His thoughts went back to the impassioned inquiries of Acumen’s end-users, and he started researching the education space. He visited numerous private schools in Hyderabad, who told him about their difficulties in scaling up. He met Trident’s Puli, who had a plan to fund schools in rural areas.
Kyle went urban. ISFC was born in Hyderabad, a city that Kyle had come to know and understand. He could see schools everywhere in the city and decided to find out just how many there were. Two ISFC employees set off on a two-wheeler, armed with a global positioning system (GPS) device to map private schools. When they finished, they had details of 3,000 schools. “That’s a minimum,” says Kyle. “There could be more.” They were in dedicated buildings, shared buildings, houses, shacks…
Kyle feels private schools like Pragati Vidyaniketan are in demand because they teach English and computers. The poor want their kids to speak English. “They feel it would make a big difference to their children’s future,” he says. “You’ve got very poor families paying to send their children to private schools. Many a time, state-run schools are next door, but they are perceived to not work.” Even though private schools are in demand, they are cramped for funds to increase student intake and expand facilities. That’s where ISFC comes in.
To qualify for a loan from ISFC, a school should meet six criteria. One, it should be recognised by the government. Two, it should have completed five years. Three, its student strength should exceed 400. Four, it should have a pass rate of at least 80% in Class 10. Five, it should be English-medium. Six, its monthly fee should be between Rs 250 and Rs 600 per month—the range that ISFC considers to be affordable for students and viable for schools. In ISFC-funded schools, the average monthly fee is around Rs 400. Since parents are paying, they take their child’s education more seriously. “They want value for their money,” says Kyle.
ISFC charges 20% for a three-year loan of less than Rs 10 lakh, 21% for four years and 22% for five years. For amounts above Rs 10 lakh, the corresponding rates are 21%, 22% and 23%. That is costlier than a term loan from a bank, but cheaper than a personal loan—the practical option from the banking sector for school owners. And ISFC doesn’t base a lending decision on the school’s holding structure (trust/society) and financials. “We lend to owners, not to schools,” says Kyle. The school owners’ personal assets are kept as collateral (the school’s assets come after that). In banking parlance, ISFC gives out loans akin to personal loans—at better rates than banks. Today, it has 42 employees, and a loan portfolio of Rs 4.9 crore spread across 60 schools.
The financier doesn’t just lend money. It also helps schools in other ways, from planning a project to executing it. ISFC has a civil engineer, who works with schools on construction issues. The engineer ensures a fair appraisal of the school’s funding needs and quick execution.
ISFC ensures the money is used only for the intended purpose in the way it disburses it. “Although the loan is disbursed in the name of the school owner, the money never goes to him,” says a field officer. “Depending on the purpose of the loan, the money goes to the service provider—for the work done or products supplied,” she adds. Lastly, ISFC instils financial discipline in borrowers to prevent them from slipping into a debt trap. This is the company’s way of making sure it gets its money back while also ensuring the schools grow to borrow again from it. “Banks don’t walk this extra mile with their borrowers,” claims Kyle.
ISFC has details of 3,000 schools in Hyderabad and 2,000 schools in Bangalore, where it began operations last month. Although not all will meet its borrowing criteria, Kyle is not concerned. “We are not rushing to achieve numbers,” he says.
Those who don’t meet ISFC’s lending criteria have a chance to skill up. Gray Matters Capital, a not-for-profit outfit promoted by ISFC’s American parent, is working with small, promising private schools in Hyderabad to evaluate and improve all areas of their functioning. “We believe micro-entrepreneurs can solve a lot of problems,” says Molly McMahon, Programme Officer (India), Gray Matters. “They (affordable private schools) are doing it. Let us help them with resources and opportunities to make them more successful.” Gray Matters is trying to find appropriate technologies and intervention at affordable prices.
The fund conducts a 360-degree evaluation of the school, from learning to governance, from strategy to financial performance. So, for instance, it uses tools like ASER (Annual State of Education Report), devised by education NGO Pratham, to assess student achievement and learning levels.
“It’s like building the infrastructure of accountability and information sharing,” says McMahon. “In a market of 70,000 schools, how do you tell the difference between a good or bad school,” asks Kyle.
To address this question, Gray Matters is working with Micro-Credit Ratings International (M-Cril), a microfinance rating agency, to develop a rating system for affordable private schools. In 2009, with funding from Gray Matters, M-Cril undertook a pilot programme in Hyderabad in 10 affordable private schools.
A rating is a compact assessment of where a school stands in terms of learning quality, academic performance, parent engagement and financial performance. “The rating could be a game-changer,” says McMahon. “Very limited data is available at the school and market level.”
A rating is of immense use to schools, lenders and parents. Schools can assess themselves. “The schools that participated in the rating learnt a lot about themselves,” says McMahon. Parents can get pointers on where to send their children. And lenders can assess whether a school is creditworthy.
“Rating is the only way to segregate education entrepreneurs,” says Sanjay Sinha, Managing Director, M-Cril. “Some are serious, but some are there just to make money.” At present, the rating fee is Rs 1 lakh and is being paid by Gray Matters. Commercially, though, it will have to be paid by the school. M-Cril and Gray Matters are looking to reduce the rating fee to Rs 30,000. That’s a reasonable sum for schools borrowing Rs 15 lakh, as it would amount to 2% of the loan amount.
While Sinha found a high degree of variance in standards across schools, the one pleasant surprise was the parent profiles. “Private schools are reaching down to very low-income families, says Sinha. “This shows the extent of concern for education,” he adds. His finding is corroborated by V Praveen Kumar, Principal of another ISFC-financed institution, Ushodaya High School, located in Attapur, a backward locality situated on the outskirts of the city of Hyderabad. “About 90% of the parents who send their kids to Ushodaya are illiterate, daily-wage earners,” he says.
Sinha is least surprised about this phenomenon catching up in South India, especially in Hyderabad, the microfinance capital of India. “It has more social enterprises and social capital,” he says. “Today, affordable private schools are where microfinance institutions were 10 years ago.”
Puli of Trident Microfin wants to build a lending ecosystem for schools that are missed even by the likes of an ISFC. That means schools that require less than Rs 5 lakh and schools in rural areas. Soon, Trident is going to start giving out loans ranging from Rs 50,000 to Rs 5 lakh to educational institutions. Like ISFC, it too has loan-eligibility filters for schools: government-recognised, three years in the business, at least 300 students, a pass ratio of 90% and a dropout ratio below 30%.
To improve governance, Puli is considering asking for a board seat in schools where Trident’s exposure exceeds Rs 2 lakh. He knows his proposal will raise eyeballs. “We (Trident) ourselves will add no value by taking a board seat,” he says. Instead, he wants to rope in retired government-school headmasters and pay them a sitting fee. “The school will gain from their experience as well,” says Puli. “The thought is innovative, but not everyone will be suited for the job,” says M-Cril’s Sinha.
ISFC’s Kyle says rural is a tough segment to crack. “It’s a different challenge due to smaller schools,” he says. “Also, it’s harder to attract teachers.” Puli says he has done his homework. Before it shifted to Hyderabad in September 2008, Trident was headquartered in Mancherial, in Abidabad district of Andhra Pradesh. Impressively, Mancherial has about 35 educational institutions servicing a population of around 100,000. Among Trident’s existing borrower-members, over 95% send their children to private schools. “Parents are willing to forego something for their children’s education,” says Puli.
School financing has other business linkages, which Trident can feed off. It can take care of fee collections for educational institutions—the typical outsourcing model. And when its borrowers don’t have cash, Trident can pay the schools on their behalf and later recover it from them through a microfinance loan. In the absence of weak institutional structures, it will take innovations like these to make education accessible and effective.