HDFC Credila Financial Services, which specialises in education loans, says it has been successful in particularly helping students who are otherwise deprived of a good education due to their poor economic condition
In an interview to Moneylife, Prashant Bhonsle, country head of HDFC Credila Financial Services, explained various aspects of education loans in India, and elaborated how HDFC Credila is working to help students and universities. He discussed the criteria for sanctioning loans, interest rates, credit rating of students and co-borrowers, rating of universities and so on. Mr Bhonsle also answered questions about the shortage of basic education and facilities. Following are excerpts from the interview.
Moneylife (ML): How different is HDFC Credila from banks and other financial institutions, whether they are in the public or private sector? What are your unique features?
Prashant Bhonsle (PB): We have innovative products and services. Many lenders prefer giving loans to students applying at institutes and universities recognised by National Assessment and Accreditation Council (NAAC) or some other accreditation agency. Seeing the growth in the number of private institutes, we are also providing loans to such students. We take into consideration factors such as the quality of education, employment potential, and so on, when sanctioning loans. There is flexibility in the collateral guarantee. We provide services for legal verification of collateral documents, whereas banks ask students to do that on their own. Banks insist on a confirmation of admission and universities ask for a proper guarantee that finance will be secured to pay the fees. Here the student is in a catch-22 situation. At Credila, we give the student the sanction letter based on his documents and the institute he has applied to. Once admission is completed, the loan is disbursed. We provide loans of up to 2 0 lakhs. We fund students even up to 100% of their fees for those who can't afford to pay margin fees, based on merit. Finally, we even consider relatives, cousins as co-borrowers (other than parents), which is generally avoided by banks. And we don't have hidden charges.
ML: How many students have availed of education loans from Credila, for higher education within India as well as to study abroad? Has there been an increase in loan disbursements?
PB: There has been a big increase in the number of students applying for education loans in both segments-for those seeking to study in India and at foreign universities. The cost of education is rising and these days students want to be independent in funding their education, so many of them apply for loans. Another reason is the incentive on loans-students can claim a tax benefit on the interest paid. We saw around 500 students applying on each day during the peak season. In the last study we did, we recorded an average one student applying every minute at Credila.
ML: HDFC Credila offers customised loans for students and co-branded loans to academic institutes. Can you explain these products?
PB: The customised loan programme, as the name suggests, is structured based on the institute and the course, or the individual student. Here we evaluate factors like the student's and co-borrower's credit history, fees schedule and repayment capabilities holistically, after which the loan amount is decided. A co-branded loan is basically using the HDFC Credila tag together with the particular university or institute. Suppose a new course is launched by the university, many of the banks may not sanction loans to the students applying for this course. But HDFC Credila partners with the university to become an exclusive loan partner and provide students with finance for the course.
ML: As per the information on your website, there is a borrower and co-borrower's underwriting criteria as part of the eligibility for a loan. Please explain the criteria.
PB: Primarily it is the occupation profile of the co-borrower, which in most cases are parents. The credit history of the co-borrower forms a major pillar in sanctioning loans. We have tie up with credit bureaus to evaluate credit history. But we do have provision for deviation if the student is highly meritorious.
ML: HDFC Credila has an exclusive credit scoring model for student loans. Is the score given in a particular number or in percentage terms? What is the range for high and low scores? Does the credit score of a student influence the amount of loan he will get?
PB: In 2005-06, when we launched our service, we conducted research to understand the domain of the education loan sector in India. A lot of data pertaining to the sector was studied. We partnered with Fair Isaac Corporation to give credit scores for education loans, based on the data collected by us. It is a complex algorithm of various factors such as the quality of the student, the institute, the type of course, the quality of the collateral, credit history of co-borrowers, and so on. We also give weightage to the merit of a student. The score depends on each individual student and there is no particular range.
ML: How will a credit score given to universities based on their programme benefit them?
PB: This is a ranking which is given to the university. Many times, universities lack in talented students as meritorious ones are financially weak. When we co-brand with a university, we become a platform for the student applying at the university and the loan is provided to him/her there. This way the university gets quality of students and vice versa.
ML: HDFC Credila offers partner programmes for foreign universities which allow them to provide HDFC Credila Financial Services as a student loan provider to fund Indian students entering Indian Universities and Indian students entering US universities. Is this limited to universities in India and the US?
PB: This is not limited to American universities. We have funded loans for students applying at universities across the globe. Many students have been enabled loans to study at campuses in New Zealand, Germany, France and other countries.
ML: How many universities-Indian and foreign have you partnered with? What has been the overall response from universities and students who opted for a loan from you?
PB: Many universities from both India and abroad have partnered with us. The response has been good and encouraging from both students and universities. Students who have benefited from the loan have recommend others to apply to Credila. Universities see it as a value-addition service. Insead University in France has recommended us on their website for loan services for students.
ML: What is the current rate of interest and how is this calculated? Does HDFC Credila have a universal interest rate for all, or is the rate calculated depending on the university? For instance, State Bank of India charges special interest rate for students of ISB Hyderabad and it has a different rate for students of other institutions.
PB: We have both services. As I said earlier, various factors are taken into account for customisation of loans and interest rate at the individual student level. The rate of interest can vary depending on the institute, the student's academic achievement, and so on. We only provide loan on floating interest. We too provide special interest rates to certain institutes. For students applying from ISB Hyderabad we have provided loans at a rate of 9.75%. There is a special rate for universities like Insead University.
ML: Azim Premji recently donated around Rs8,846 crore as a gift towards his foundation, which promotes education and related work. Do you think this trend of big financial houses investing in the education sector will grow?
PB: Personally, I think it will be beneficial. The demographic deviation of India, as suggested by policymakers, corporate, states that education will facilitate the workforce. The scope for this sector is growing.
ML: The cost of private education is spiralling day by day. Will corporate investment in the sector (as it is happening now), make it more costly, or is it the other way around? Also, is it possible to opt for a public-private partnership, given that the large population is dependent on the government for even a basic education?
PB: Currently there is a lot of positive environment for the education sector in India. The government is taking steps which are conducive for the sector to grow. The cost of education is definitely increasing, but the quality is also increasing. In this situation a better enabler should be provided, which can provide financial backing to students for achieving quality education. Public-private partnership is good and I see it growing in the right direction.
ML: Mahindra & Mahindra managing director Anand Mahindra gave $10 million to Harvard University and Ratan Tata's Tata group gave $50 million to Harvard Business School. At the same time there are many people in India who cannot afford even a basic primary education, usually because of the lack of finances and facilities. Do you think there is a need to give more attention to basic education and provide funds to make it affordable to everyone?
PB: Basic education should be given more emphasis. The current five-year plan, that is the 11th plan, is making positive changes in the area of primary education. The incentive along with educational programmes like the mid-day meal programme, and so on, have helped improve the attendance level. A better enabler who can provide loans to students will contribute to making education more affordable. This is currently going in a positive direction.
ML: As on 31 March 2010, non-performing assets in the education portfolio of public sector banks had increased and now they are putting certain mechanisms in place to check delinquencies. How does HDFC Credila track students in case of default or delay in re-payment?
PB: We constantly communicate with students during the academic tenure of the student who has been granted a loan. We generally ask for 3-4 references, apart from the borrowers. Again there is constant engagement with all the references. As of now, for the students going to the US, we have tied up with some government agencies there which help us track a particular student. But since we only specialise in students' loans, we undertake thorough research, so we have the upper hand to track the student in case of any default.
ML: There has been talk that the government's UID (unique identity) project will help trace borrowers. Also, banks could seek updated data from credit bureaus to help overcome these defaults. Do you plan to tie up with any of them?
PB: We have partnered with Credit Information Bureau (India) to evaluate credit history while screening the application. There has been cases were loans have been rejected because of credit history. But we don't solely depend on credit histories, but there are various factors (as I had explained earlier) that play an important part. As regards the UID project, we would want to partner with them.
ML: When it comes to education loans, there is a lot of documentation hassle, which is the biggest hurdle for students who are opting for education abroad. How can this be made more user-friendly for student borrowers?
PB: Customer education is the most important. Every aspect of education loan portfolio should be explained. At HDFC Credila we perform KYC (Know your customer) as per RBI guidelines. Most banks don't provide education on the student loans mainly because this is one of the services provided by them also it is seasonal in nature. We make parents and students understand that opting loan will not only give them tax benefit but also build credit history.
ML: There is a lot of confusion among people regarding education loans and the processes. How do people seek guidance on this?
PB: I think there has to be some onus on the borrowers to undertake research. Students should start their preparation, especially financial preparation, much earlier. A lot of information about banks is available. An early start will make things easier.
ML: Given the fact that there is an increase in the number of students opting for higher education, the number of education loan-seekers has also increased. What is HDFC Credila's roadmap for the year ahead?
PB: We are aiming at multi-fold growth. We want to scale up the loan disbursements, for which we are expanding our operations, workforce and locations.
ML: What are the major challenges HDFC Credila faces in verifying applications, disbursing loans and recovery?
PB: Our operational capacity is very efficient, because of which there is hardly any challenge in verifying, disbursing, or even recovering loans. Our main challenge is to reach out to a larger number of people. We are expanding our operations in phases. Our biggest challenge is the cost of funds. Being a non-banking financial company the costs are higher.