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How student loan startups could shape shape the way loans are provided

India's education loan game is getting tougher by the day. With rising costs in education, sometimes dreams can't be weighed

After China and the United States, India’s higher education system is the world’s third-largest. After independence, the higher education system (1) in the nation grew rapidly. Over the years, it has experienced rapid expansion. There is an enormous demand for university education, and India has seen phenomenal growth in the number of universities and colleges over the past few decades. In the case of professional colleges, the increase is even more pronounced. All of this has been leading to an increasing privatization trend. There is an increase in fees due to privatization, leading to the introduction of an education loan scheme that allows students to enter professional colleges.

Education plays a key role in a nation’s development. The cost of education has become very high because of the advent of self-financing colleges. Education loans were a great help to students who could not pursue professional education because of financial constraints. But in terms of repayment status, loan programs turned out to be deceptive. One of the country’s vital assets is its educated population. The government performs a very vital role in providing education to all those in need of finance (2). Education costs in India and outside India are quite extortionate. However, they do not have the financial resources to support lending institutions such as commercial banks. Although government grants scholarships, government subsidies, etc., due to high competition and limited opportunities. Banks, especially the public sector, have a social responsibility and an obligation to finance poor but well-deserved students’ educational aspirations. Education loans make higher education more accessible for those students who belong to poverty hit areas (3).

Because of the non-recovery of loans and the central government’s financial difficulties, the National Loan Scholarship Scheme began to finance the meritorious students for pursuing higher education had been discontinued. The Government of India’s educational policy has signaled private involvement in higher education. Self-funding colleges and universities have been authorized to operate in the country. Educational loans to meet educational expenses were also suggested. Tuition fees were not affordable to many individuals in the self-financing colleges and deemed universities. There was no capacity for the state-owned or aided colleges and universities to absorb all eligible students in their roles. In 2001, the central government and the Indian Banker’s Association presented a public education system to provide educational loans at affordable rates to address these issues (4).

It may sound easy to secure education loans in India, but they are full of hurdles and formalities. The government has refined the standards to facilitate loan disbursement. However, there are still many more in place, resulting in getting an educational loan for a student. Some of the challenges facing both students and banks include the customization of the loan product to meet the requirements; sufficient collateral security to cover the amount of the loan, proof of the appropriateness of the university, college, and course requested; timely approval of the loan to meet the deadlines associated with admission; post disbursement issues, etc. These activities require a lot of energy, time, effort, and energy (5).

Nowadays, due to such facilities that excruciate students’ and parents’ patience, startups that focus on simplification have emerged to provide education loans. These education loan providing startups are growing faster as they receive funding from top investors. The rise of loan startups is the need for the hour as they help the poor and those who aim to achieve better education that normal banks today fail at providing unless you have a good credit score. Facts are facts, but the way something runs is what these startups try to reduce. Their motive is for the betterment of loan providing facilities and making it hassle-free for the masses.

Why is Loan procurement tough in India?

According to a recent report, total non-performing assets in the education sector increased from 2615 crores rupees in March 2013 to 6336 crores rupees in December 2016. That is, Indian banks saw a 142 percent increase in student loan defaults during just over three years (6). The proportion of NPAs increased from 5.40 percent to 8.76 percent in percentage terms. The larger problem of the increase in student loan defaults is problematic, to begin with. Until recently, student debt and increasing credit defaults have been seen as an American problem, where 44 million borrowers owe 1.3 trillion dollars in student loans (7).

Due to rapid population growth and, more specifically, India’s demographic profile, student statistics have increased; the commonly held belief that a college education enhances one’s life chances and the government’s force to enhance the gross enrolment ratio. In the 18-34 age category, (8) the population had increased from 350 million in 2001 to 430 million in 2011. It is anticipated that their actual figures will rise even more to 464 million by 2021, before declining to 458 million by 2026. Even at around the same time, even though they feel that it improves their life chances, more Indians are trying to seek a college education.

Understanding the education motive

In India, the problem of growing student debt and loan defaults may already have arrived. With high actual loan defaults and the probability of worse happening becoming a feature of high-income nations with comprehensive higher education institutions, the signs are unsettling for India, where the higher education system is so broken. However, hundreds of millions of unemployed young people are mass-produced. Therefore, to tackle the problem before it overwhelms us, it will become necessary to understand the drivers of the increasing number of students’ bad loans (9).

Over the years, the cost of a college degree has gone up, even at public institutions. To begin with, private institutions, of course, are more costly. According to the report, the fee charged to private institutions is twice the government bodies’ fee. The increase in the cost of having received a college education has meant that student loans are the only way for several students to fund their education. Even among students belonging to middle-income families, there is a greater demand for loans. With time, what has also happened is that even the number of students enrolled in private institutions has increased, mainly because of the slow growth of public institutions and their physical and academic growth.

The sluggish economy

Due to the state of the Indian economy, student loan defaults have also risen. It seems that a broad consensus is emerging that not enough jobs are being created. The term, jobless development is thrown around regularly and for a good reason. The growth of employment in the country has been sluggish, according to the 2016 to 2017 Economic Survey. The unemployment rate was 5 percent of the labor force from 2015 to 2016, up from 4.9 percent in 2013 to 2014. However, during that period, a growing number of Indians entered the labor market. Given that many college graduates also lack the knowledge and skills required by employers, young people’s opportunities appear rather limited (10).

Shrinking loans, Shrinking dreams

The amount of education loans paid out in India has reduced by 25 percent from the previous four years. As of March 2019, from three lakh students as of March 2015, the percentage of students trying to secure loans fell to 2.5 lakh. The reduction is due to the high degree of non-performing assets. According to a report, these have increased significantly to 12.5 percent in the past four years. Also, throughout that period, the number of accounts for active loans dropped significantly. The total number of active loan accounts or students fell from 34 lakh in the previous four years to 27.8 lakh for the same period. In the meantime, the average loan ticket size rose to 9 lakh rupees from 5.3 lakh rupees (11).

Saving the day – the startup mission

The education loan system is broken, and those who have struggled through at phase know the pain. These people have tried to get that pain into a gain for the welfare of others as well. Amongst these measures taken by a new generation of loaning startups to evaluate students before providing loans are aptitude screening, evaluating education records, and assessing the income potentials of borrowers. To make sure students get a job and their interest payments are ensured, they aren’t reluctant to go the extra mile for them. India’s market for education loans is worth several billion dollars, experts say. Loan startups want to change the market’s way, but they also want to make sure the loan is repaid. “If startups can link the disbursement and repayment of loans to jobs and student employability,” said Srikrishna, partner of Unitus Ventures, which has invested 2 million dollars in Eduvanz.

Fresh funding would be used to develop new credit products, risk mitigation based on artificial intelligence, and smoother collection tools to support borrowers. It will be using the money to boost the team’s strength to broaden India’s tier two and three cities. In addition to Eduvanz, there is indeed a string of companies in India that offer online education loans, including Credenc, which last year raised 2.5 million dollars from Omidyar Network and Better Capital, as well as Credelia and Shiksha Finance. In 2017, Eduvanz received a license from the Reserve Bank of India from a non-banking financial company that offers clients financial products and services (12).

Credenc is one such startup that is among the early-stage companies trying to mend the country’s broken education loan market. According to the 2016 All India Survey on Higher Education, conducted by the Ministry of Human Resource Development, India has around 800 universities, more than 39 thousand colleges, and almost 12 thousand independent institutions. Because banks primarily do not cater to students entering colleges that are not among the top five hundred, there is an opportunity for these startups. Burdened with non-performing assets, as defaults mount, banks have gone slow on education loans. Information from the Reserve Bank of India indicates an 8 percent drop in education loans from more than 24 lakh loans in March 2018 to 22.5 lakh in June 2019 (13).

These teams operate with the students and their colleges to ensure that they are placed to avoid default. Ramamoorthy said, “There is a gap between jobs available and expertise in the industry, but if these startups can bridge that, it will grow up to be a huge opportunity.” Eduvanz is betting on courses in demand in the job market, such as blockchain, data analysis, data mining, and others. It evaluates the borrower’s educational qualifications to gauge whether the student will be good at such courses. It has a 100 crore loan book with 1 500 loans for which repayments have been made. It currently claims to have a bad 0.01 percent share of assets.