In conversation with Mr. Varun Chopra, Co-Founder, and CEO at Eduvanz financing, we tried to understand the rise of the Indian EduFin industry, backed by the booming EdTech sector. We also discussed the effect of pandemic and the future going forward.
"India's learning needs democratization instead of commoditization, and education loans can precisely achieve that. The education finance landscape is shifting from being lender-driven to being learner-driven. I foresee a lot of positive developments with many players, including top Banks and NBFCs, noticing the growth potential and trying to reach out to learners at the grassroots level either directly or via partnerships with fintech like Eduvanz.
I expect Exponential growth from Tier 2 and Tier 3 cities where learners are not just able to access varied online courses but are also more aware of cashless mechanisms, mobile wallets, and innovative financial products like BNPL, which can be seamlessly integrated into their learning, growth, and development needs.
The only constraints I see in the future are people's mindset towards short-term and long-term loans, the perceived hassle in getting one, and the lack of synergy between various partners and stakeholders in the learner's journey. But we can answer this with deep tech integration between the lenders and learning partners, using alternate credit underwriting data points, impeccable service standards, and transparency of the processes with borrowers. When you give a learner control over their financial decisions as well, the actual learning happens."
Q. What is the current stage of the EduFin industry in India? What do you believe are the major growth drivers and the challenges in this industry? How has the process been accelerated with COVID coming into the picture? Will the growth continue in a similar fashion, or will things take a turn once things open up?
The higher education market in India is fairly mature since there has been a fair share of students pursuing college abroad, which is typically very expensive. The banks have played a key role in financing these kinds of courses. In 2020, ~Rs. 12,000 crore higher education loans were disbursed in India, a decently good number. This market will only get more and more expensive with time since many more students will apply for these loans.
To add on, while the study abroad market has traditionally been extremely fast-paced and growing, it also has high NPAs. NPAs are the primary reason some financial institutions do not prefer the education loan market. Last year, close to 10% of the book was under NPAs at one point.
Broadly speaking, we can divide the Indian education market into a few segments-
Pre-K, K-12, up-skilling & re-skilling courses, higher education (India), and test prep courses. Apart from this, we have an overseas education market.
The higher education loan market in India can further be classified based on the institutions. Typically, a student in a top-tier college like IITs, IIMs, etc., would have easier access to banks and financial institutions because it is widely accepted that the consumer in this segment is more likely to have better placements and chances of employability, ultimately translating to higher repayment capacity. Therefore, even if risks like lending without a co-borrower or collateral are involved, it is still considered a safe loan. In contrast, assessing and taking risks is challenging when going deeper into the tier 2 and tier 3 level institutions. But, with challenges comes opportunity, so today, most of the NBFCs and other players are vying for this market now.
Another segment showing promise and is picking up well is the K12 and the up-skilling & re-skilling market. Since the pandemic began, the K12 and up-skilling & re-skilling segment investments have witnessed exponential growth. As a result, most investors have exposure to Ed-tech companies in their portfolios today.
India, a young country with close to 600 million people aged 20 To 45, is essentially the target customer. This means that when you finish school, you will go to college, and you will augment your learning with upskilling & reskilling courses so that these training modules can help you learn skills and get employment.
Since India is moving fast, new skills are coming into the market - Blockchain, cryptocurrency, data science, analytics, AI, ML, robotics, and several other skills that were unheard of a decade ago. Even though all these technologies will lead to automation of the physical labour or repetitive jobs, substantial employment generation will go hand in hand because you will need a workforce skilled in this technology who could deliver the customization and build over these concepts. Moreover, this shift towards future technologies would also mean that the existing employees will need to be trained should they wish to upscale in their career and not feel left out of this technological revolution. Therefore, I foresee a definite boom in India's education loan market for upskilling and reskilling over the next few years.
That being said, the market for online degree programs finds favour with many players like us since we are majorly focused on upskilling and reskilling.
So, I think education as a vertical will indeed retain its prime place in the financing sector and, broadly, two or three categories of Fintech players that will emerge in the coming years. Earlier education was just one of the products that NBFC's or banks offered, but now full-fledged financing entities will start getting created for these segments of learners.
Q. Which are some of the major FinTech companies specializing in EdTech loans currently?
In the upskilling and reskilling sector, in my opinion, Eduvanz today is one of the most prominent players. Do we have a competition? Yes, some fintech entities are staking their claim over the market share. These have emerged as offshoots of existing players like Banks and NBFCs or are upcoming startups. There are market players who would tie up with banks and financial institutions, source lead, and offer loans for them. Their focus is lending across various verticals, and education is just one of the many ways to corner a market share.
Either way, I am confident that Eduvanz is the frontrunner and probably the first NBFC in India with the learner, education, and upskilling as the core area of focus.
I think there's an opportunity to create a billion-dollar AUM in this segment easily, but the market is still nascent, and full potential is yet to be ascertained. One of the reasons for this perceived uncertainty is that most players are still assessing the impact of COVID on shaping up this market and its effect on employment.
Secondly, there are sectors and EdTech players that have just begun emerging with the recent funding inflow, and now they will spend a lot more on acquiring customers, as a result of which this market will now start to grow.
Finally, with the private investments flowing in and the simultaneous public policy changes impacting online education directly, the market has much-unrealized potential and looks promising. For example, in the new UGCI policy where Indian universities can offer diplomas for the first time, online education becomes a preferred mode of learning for the learners who want to be earners soon will opt for these diplomas now, instead of choosing a four-year degree program.
So, this will add much value to this pocket, but it is tough to give a number because I think every player is trying to figure out how soon and how much it could grow. Typically, in a developed country's up-skilling & re-skilling market, ~75 to 80% of the class would opt for financial support. However, this number drops close to 25-30% in other developing countries. This penetration is still shallow in India, ~8 to 10%. We can easily take this number up to 30-35%. It can only be done if we maintain a strong focus on technology and processes are created in partnership with the learning institutes.
Q. What are the partnership sharing models with the EdTech Companies? Is there any commission margin also involved? What happens in the case of NPA's – is it shared by both the EdTech and FinTech companies?
Our offering is a simple loan, just like you have a loan on a laptop - that's how it works. In this, you have interest, subvention, and a hybrid product. There is no commission involvement either when a tie-up between the EdTech Company and the FinTech Company.
As far as the NPAs are concerned, this segment calls for intelligent lending. It's not about just the borrower-based lending here. The lending has to be done by understanding what kind of institute the person is applying for and the candidate's future earning potential. The players who understand this ecosystem well are the ones who will do well, and NPAs won't be a challenge for them.
Even when underwriting, our algorithms predict the Employment Risk Score, which is essentially the ability of an institute to secure job placement for a particular student and his future earning potential. This score helps us reach out to the students who cannot access financial support from traditional banking and NBFC models that focus on current earning capacity. The ability of an institute to place a particular student in a job helps us take into account the future earnings of the student and lend to students who cannot get loans from the traditional banking system. But for At Eduvanz, when a student is applying for a loan, searching for a technological or research course, for example - we will say- even if they are new to credit, we should finance their aspirations because he will get a job placement of a certain earning potential over a period of time. This extrapolation gives us and our algorithms enough confidence to lend to those students.
As the industry evolves, we collect more data on each skill performance of these students, their batches, placements, and loan repayment patterns – These rubrics offer us a chance to work our underwriting criteria, and I am sure that it will bring much stabilizing to the NPA's.
Q. What is the average interest rate? How does it vary with loan tenure or credibility? How is it assessed?
Like any other vertical, the pressure to remain price competitive in lending for education and upskilling is there. Because the ecosystem partners are willing to continue sharing the interest burden, benefitting the customers, over 70% of our portfolio continues to remain a no-cost loans portfolio. For borrowers, the market predominantly continues to be a no-cost or low-cost loans market.
So, the concept of average interest rate is not applicable here because it depends on various factors like the borrower's profile and the kind of courses that are financed. For example, for some courses, you can get a loan for a competitive rate of 10-11%, while for some programs which don't have a proven track record for employability or earning expectations, the rates could go up to 18-19%. So, the interest rate range could vary from a case-to-case basis based on the credit and risk assessment.
Q. What is the basic revenue generation structure for the FinTech companies providing no Cost EMIs? Is it feasible for you to give out No Cost EMIs for smaller amount loans? What is your processing fee?
The revenue model is similar to personal loans, how you get a laptop on Flipkart for no-cost EMI. In addition, the education institute gives a discount, which acts as an interest payment for us.
We want to keep our IRR profitable, and for that, we usually depend on how many subventions we are getting from the institute, the risk assessment of borrower, institute, and the industry based on which we may or may not charge processing fees from the borrower.
Q. What do you think is the overall size of the India EduFin market in terms of loan disbursement on the basis of total loans? How has COVID impacted the market and at what rate did the market grow (Post COVID)?
This market will grow phenomenally well. I think Y-o-Y, you will quickly have at least 3X growth in this market in the coming 5 years. Currently, across sectors, the monthly disbursal should be ~ INR 200- 300 crores.
With the unfortunate event of COVID, the digitization of education has witnessed an unprecedentedly rapid pace. More individuals are either working from home or looking for better career opportunities since now they feel they can spend more time upskilling themselves. This will mean higher enrolments. So, I think this market will continue to grow for years as more investment gets pumped in, with additional focus from the government and the private sector. The institutions would aim to launch new courses, more accessible ways of learning, and even vernacular courses. You might soon have customized course offerings for people based on their unique career and professional needs or aptitude. Furthermore, corporates will push their employees to learn new skill sets, boosting the upskilling and reskilling segments.
Q. What is the average loan tenure opted by the Indian consumers (3/6/9/12/15/18/24 months)
Currently, it's going to be close to 12 months. I think it will stabilize to approximately 15 months. Depending on the cost of the courses and other factors over a period of time, the average loan tenure could vary. As education institutes reach out to more individuals across Tier 3/4 cities in India, the availability of education for unbanked/ new to banks and people at the bottom of the financial pyramid will become easier. This quality education can be accessible to such individuals via our loan products. Moreover, to ensure easy affordability, we will provide longer tenures to make EMIs easy on the pocket, resulting in a longer term of up to 24 months.
Q. What is the overall percentage (%) split of the AUM in terms of?
a) Type of City: (Tier 1, Tier 2, and Tier 3)
I think tier one and Tier 2 will dominate - Around 60-70% of business will come from there, and below Tier 2 will be the remaining 30-40% of the business. Between tier 1 and Tier 2, I think the boundaries are very blurred today, so it is not easy. However, Tier 1 will definitely dominate because the working class returning to work will continue seeking out those courses. So I would put my money saying that close to 30-35% will be tier one. Another 20-25% will be Tier 2. The remaining would be Tier 3.
And for FY2026, It might or might not follow the same trend because while we are talking about online education, you are also seeing people returning to work, but that effect will get negated with online education coming up. So students sitting out of Tier 2 & 3 cities get access to quality education online. With the penetration of the Internet and the creation of infrastructure, I think there will be a trend where boundaries between tiers 2-3 will merge. Tier one will continue to lead, but Tier 2 & 3 will get very close to each other.
b) Type of Courses: (K-12, online higher education, Test prep, upskill and reskill)
Up-skilling & re-skilling will probably be the most prominent sector over the next 5 to 10 years, test Prep will be the second one, and K12 will be the third one.