The government has diluted equity requirements for the higher education financing agency (HEFA) after potential partners expressed their inability to infuse Rs1,000 crore into the vehicle meant to fund educational institutions at market rates.
Instead of the Rs2,000 crore equity portion that the cabinet approved earlier this month, with Rs1,000 crore coming from the government, HEFA will now have Rs1,050- 1,100 crore of equity that will be used to raise funds from the markets for lending to educational institutions.
Potential equity partners in HEFA balked at infusing Rs1,000 crore into the vehicle, given that it’s expected to be a low-margin business, prompting the government to set its sights lower, two government officials said on condition of anonymity.
Instead of a partner pumping in Rs1,000 crore, it will now be required to put in Rs50-100 crore, one of the two officials said. The government will contribute Rs1,000 crore.
“HEFA may not be a volume business initially and the profit margin will be low. So putting in Rs1,000 crore of equity money was a little tough on the partner. Banks that the government interacted with were hesitant to pump in that much of money. So we decided to be more rational in our expectations,” the first official added.
With no separate infrastructure, no staff and the significant dilution of equity requirements, HEFA will start operations on a shaky note.
HEFA marks the beginning of a market-linked education financing structure in India and a departure from the traditional grant-based system of funding higher educational institutions.
HEFA will be launched in a couple of months.
The government has selected Canara Bank as its partner. Canara Bank is also the nodal bank managing the education loan interest subsidy scheme.
An email sent to Canara Bank on how much money it was infusing in HEFA remained unanswered. An email to Syndicate Bank, which was interested in partnering the government in the project, also remained unanswered.
HEFA will leverage the equity money to raise Rs20,000 crore from loans and bond sales to fund infrastructure development at central educational institutions like the Indian Institutes of Technology, National Institutes of Technology, Indian Institutes of Management and central universities.
HEFA will borrow funds at close to the 10-year gilt rate, which is around 8% at present and lend to institutions at a slightly higher rate.
The officials said that since the government does not expect HEFA to pick up business faster, HEFA will be an asset-light model.
“Instead of separate buildings or fresh staff, HEFA will be housed in a bank with the banks staff manning it. Aim: stay asset-light,” the first official added.
HEFA will be overseen by a board that will be made up of senior officials from the finance and human resource development ministries, banks and independent experts.
The second official said the HRD ministry will pursue corporate entities and individuals to put money into the fund and get tax exemption certificates.
“Instead of giving to individual institutions, government will urge corporate houses to put in a portion of the CSR (corporate social responsibility) money in HEFA. Likewise, the high net-worth individuals will be encouraged to contribute to HEFA and take tax benefit,” said the second official.