The reluctance of banks to disburse education loans in its effort to cut risky assets has helped Avanse, a non-banking financial company that works like a start-up, carve a niche in the education loan market.
The firm has started making profits within two-and-a-half years of starting operations.
Education loan and career growth cannot be seen separately, said Neeraj Saxena, chief executive officer of Avanse. Education loan disbursement is also a “human resource exercise where one has to assess the career growth of candidates”, he said. Edited excerpts from an interview:
How is the education loan market working in India and why did you enter a sector that is often considered risky?
The higher-education expenditure by Indian students per year is around Rs.1 trillion and that become the market for any education loan players like me. Education loan market per se is not that big because the penetration is less than 20%. There is a huge opportunity—there is a Rs.80,000-crore market which has not been tapped.
In the last five years, the rising fees in both Indian and foreign universities and currency fluctuations have led to the growing need for finance for education. The mindset is also changing—earlier parents used to fund and now students want to fund their own education. Also parents want their kids to be more responsible—“there is money but you take a loan”. Looking at all these factors, we believe the education loan sector will be significant. Education loan now is in the same space as the real estate mortgage market was 20 years back.
The demography and mindset towards education is key for the sector. Considering all these factors, we started operation in 2013 and by 31 March 2016, my portfolio stands at Rs.530 crore. We have achieved break-even in couple of years and in fact made some profit last fiscal.
How do you arrange finance?
In July 2013, we raised some funds and after that we have raised funds a couple of times more. As of 31 March, my net worth is Rs.134 crore. I leverage that equity and borrow from the banking sector and from the market. The equity money has come from Dewan Housing Finance Corp. Ltd (37%), International Finance Corp. (20%), and remaining 43% by the promoters group.
You are a relatively young brand, how do you get clients?
We have tie-ups with more than 600 institutions in India and abroad, plus education consultants, test-prep centres who advise students on studies abroad. They are my sourcing points. As a young company, we do a lot of digital marketing.
The higher-education loan market is well established but the school sector is slowly catching up. Do you see demand for education loans from the school segment?
More than a year back, we started targeting the education infrastructure space thinking that we are already in the demand side (students) and there is a need on the supply side. We started giving education infra loans for capability enhancement to existing schools and colleges with an average ticket size of Rs.5 crore to Rs.7 crore.
As a young company, we cannot fund green-field ventures as they require more funds. And our education infra portfolio is about Rs.80 crore of the total Rs.530 crore total outstanding loan portfolio. We deliberately want our B2B (business-to-business) portfolio to be less than 20%.
What does your student loan portfolio look like?
We have 4,000 education loans accounts. In the first year, we disbursed around Rs.50 crore, in the second year, Rs.203 crore and in 2015-16, we disbursed Rs.343 crore. In total, we committed disbursement of around Rs.600 crore, of which we have received repayment of around Rs.70 crore in three years—thus the outstanding portfolio is Rs.530 crore. Customer-wise—you will see that 55-58% of the loan accounts are for education in India and rest for study abroad market. But in terms of value, the international portfolio will be around 75% because the ticket size is much higher.
For domestic market, the average sanctioned ticket size is about Rs.12 lakh and for international market it is around Rs.25 lakh. The disbursement trend is about 50% of the sanctioned ticket size. Unlike the home loan, in education loan market the sanctioned market size and disbursed size is not same.
In the last three years, the book size was small and the growth was visible. In two years, let’s say in June 2018, where do you see your company?
We are looking at a book size of Rs.2,500-3,000 crore in the next two years.
Banks hesitate to give loans fearing such credits may never be repaid, but you are quite optimistic about the space. How?
Most of the students who go abroad need a lot of money. In many universities, they want to know about the funds before offering admission. When a student goes to a bank, the bank asks for admission proof and asks “without the admission how can it give a loan”.
That’s where we come in the picture. We sanction a loan before admission. A student uses our sanction letter to apply to five universities. And wherever he finally gets admission, we offer a final sanction letter and the student gets his or her visa on the basis of this letter. My role is of an enabler—I cannot ask students to get admission to take a loan. I am not a pure lender like a bank.
Our differentiation is the understanding of the higher-education sector. When a candidate comes to us, we analyse his or her background, including scores like GRE. Then we know the kind of institutions he is going to and the career growth he will most likely follow. We rate every college and university and their quality helps us in determining the loan size, whether it should be secured or unsecured, etc.
Banks largely don’t have education expertise. We have a team whose only job is this to assess a course, a candidate or rate a university. Education loan disbursement in a way is also a human resource exercise where you have to assess the career growth of candidates. We assess their future.
You are saying education loan is an HR exercise to reduce the risk factor?
Yes. We keep in mind lots of small points. The candidate who is coming is most probably taking his first loan. So, we educate him or her about responsible borrowing. We tell him how the credit history impacts his future. All students who take loans take it in tranches, so we stay in regular touch with them. We see the progress—how is he performing in the course.
Every loan we give has a co-borrower. We want one of the co-borrowers to have a permanent address. The co-borrower in most cases are parents or close relatives. We want the borrower to start repayment from day one—simple interest.
If a borrower is very talented but does not have paying capacity for the full simple interest, we allow repayment of 5% of the simple interest. The point is repayment should start from the beginning. We assess the future income of a candidate and his potential career growth. I am trying to understand education beyond just finance. Education loan has a clear career growth aspect.
Apart from banks, there are only two niche private players in the education loan space—your firm and Credila from the HDFC stable. Do you see entry of more players?
We do expect more players in the space. We keep hearing about some players evaluating the market before entering. My view is more players should come because the market is big. More players means the loan will expand and its good for all—students, companies like us and, of course, the education sector. The bigger the base, our margin will improve.
The government has established education loan credit guarantee fund. Have you approached them to secure your own loans?
Credit guarantee fund is for banks. We intend to but don’t know if they are open to private players like us. If the number of players grow, it will be easier to approach the government.
The government is promoting skill training loans, are you funding such courses?
It’s risky. Such people are generally floating, so the problem is how will you do the file work. It’s challenging but if the government comes in between then it will be easier.
What kind of courses do you not fund?
We fund all types of courses—traditional and offbeat—that are job oriented. The candidate must have repaying capacity. The highest number of accounts are obviously for management and engineering education. The career preference is changing. There are people who want to do music technology by paying Rs.50 lakh. That’s the change we are observing and funding as per the changing requirements.