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• July 08,2011

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Funding Factor – Diverting Focus From Academics

Thanks to statutory anomalies, a very large proportion higher education institutes in India are promoted by group of individuals or SME entrepreneurs. The AICTE guidelines for starting an Institute mislead the first generation promoters on the need for funds, while corporates who understand the capital intensity shy away from the business because of the convoluted mechanisms involved to realize returns.

Most greenfield Higher Education projects will be able to recover the initial investments only in about seven years. In that sense this is a sector with a longer payback period. Also in the first few years of the institute’s life, it does not operate at full student strength [and concomitantly student revenues]. However, financing institutions in India – as they are wont to - are giving principal and interest moratorium of about 12-18 months on the loans extended to such projects. Interestingly, in the initial years, the need for capital investments in also the highest. As a result of which, promoters are always pre-occupied to either raise funds for capital investments and / or debt servicing. This is one of the root causes of de-focus from the core objectives [i.e. of academics or excellence orientation] for most higher education institutes.

This is one of the major reasons, why even well meaning, educated and motivated promoters of educational institutes find themselves not devoting time to institute building as they are busy driving admission related activities from season to another to fill up the coffers and use the intervening time running pillar to post to either re-schedule existing loans or to seek fresh loans. The irony here is hard to miss, promoters needs funds to create assets for which they need loans. However to get the loans they need to provide assets as collaterals. Goes back to the age-old chicken egg story. The lack of depth of the financial instruments of our institutions is the bane of every MSME [Micro Small and Medium Scale Enterprise]. Especially every promoter who or enterprise that wants to follow an elegant route to wealth creation.

The higher education edupreneurs are worst hit by the apathetic lack of originality and sanity. Financiers know from day one, that additional funds will be required going forward to meet genuine needs of expansion and debt servicing. However, they collude with borrowers to ignore / hide / tweak key facts of a proposal to pass their internal norms. As a result of sometimes institutes need to change financiers midway as the earlier proposed numbers are expectedly not met and the subsequent tranches are not released – the same story is repeated with the new financier as well. This is a never ending process for the first few years.

As super-human efforts in terms of endurance and enterprise are required to basic survival, it is most unfortunate all the other priorities, values and dreams go lower down the pecking order.

We have a conservative banking system, despite that for higher education sector an answer to this problem should be easier found. There is a clear case to have specific industry specific instruments to save the sector. Firstly, ninety percent of the investments are for creating low risk physical assets. Secondly, this sector has escrowable revenues to mitigate the risks of the willingness to pay. Thirdly, the capital investments become minimal after steady state after which almost thirty to forty per cent can be ear-marked for debt servicing. In addition, if required banks can seek checks and balances in the governance of the institutes – which genuine promoters will have no problems adhering to. These tools should be enough for the banking sector to design relatively risk-free longer term loans for the education.

Till we find a sustainable solution to this problem, we will not have quality higher education institutes. We will always be struggling to have at best thirty per cent employable pass-outs. And the Indian education sector will never improve, and this will have contagion effects on the economy per-se. Time we realized that this is very serious problem and needs urgent redressal through policy and structural changes.