Ajay Bohora, Co-founder and CEO of HDFC Credila Financial Services Pvt Ltd, a subsidiary of HDFC, engaged in the business of providing education loans, is upbeat about the transformational power of the business that he is engaged in. "Education changes the fortunes of families and it is deeply satisfying to contribute to that," he says.
Education loans would, on the face of it, seem to be a perfect business in India. Just as it has been for housing loans, the market is huge. Demographics are favourable ‐ a significant chunk of the population is in school or college ‐ and should be potential customers for a loan.
At last count, there were nearly 700 universities in India – with 35,000 colleges and about 25 million students. Yet, the education loan market in India is just about Rs.62,000 crore — less than $10 billion. Compare that with a market of $1 trillion in the US (a hundred times larger) for a population that is a fourth of India's and the market opportunity is visible.
Yet, the business has been messy and banks have lent money only to find that it has often not come back, making them extremely reluctant to grow this business.
Ajay Bohora studied this phenomenon a couple of years ago to find out how and why education loan defaults happen. Banks, he found, generally did not have any process for disbursing education loans. Every loan was a separate product and, hence, processing costs were high.
Further, after disbursement, there was a moratorium of two years, when no repayment is expected. And, then, over a four to five-year period, repayments have to be made.
According to Bohora, what tended to happen was that banks lost touch with their borrower, especially when student borrowers moved location in search of jobs.
To avoid the mistakes made by others, Bohora decided to set up a central repository that would have details of all education loans given by the company. Further, the business was mapped by colleges ‐ not universities ‐ and the course of study at these colleges.
This helped mitigate potential risk, since, very often the company would be in a position to advise borrowers whether it was worth doing a course and whether it would fetch them suitable job opportunities upon completion.
Then, HDFC Credila made parents co-borrowers so that partial repayment (of interest) and servicing of the loans begin immediately after disbursement. ECS was made the mode of repayment, so that there was engagement through the bank.
Term of loan extended
There were other innovations too. Bohora decided to extend the term of the loans so that liquidity is not stretched for the borrower, especially during the period when they have just begun earning.
HDFC Credila also decided to dispense with margin money in deserving cases, since it felt that education was a different asset class from other traditional assets that banks and lenders financed. Today, almost 46 per cent of the loans are without any collateral. What the company also found through its field studies was that in many cases the resources of many families were stretched with just one education loan, and the education plans of the next sibling often suffered.
Credila, therefore, decided that if the student was willing to go through the rigours of an entrance exam and had a good track record, then the company was willing to fund his/her higher studies. HDFC Credila also decided to fund the cost of attendance (travel and stay, apart from tuition fees) so that the borrower didn't end up cutting corners or borrowing again elsewhere at higher rates.
HDFC Credila has cumulatively disbursed about Rs3,000 crore in the last one decade of its existence (started in 2006) and the outstanding in its books is about Rs2,365 crore at present. Non-performing assets (NPAs) stand at a mere 0.08 per cent.
Ajay Bohora acknowledges that coming into the HDFC fold five years ago has helped the company ramp up without losing focus on asset quality. He recalls Deepak Parekh's advice: to have customer-centricity, a sound technology platform and customisation as mantras to help the company grow. The numbers indicate he has followed that advice well.