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New research reveals US$4.4 billion market demand for education finance in India

By Surabhi Narendranath

Opportunity EduFinance recently completed its largest market research study to date in India, with 360 affordable non-state schools and 754 parents being interviewed across five states over February-May 2023. The study aimed to provide a deeper understanding of both the willingness and ability to borrow amongst schools and parents.  The results will be used to build a business case for financing affordable education in India; and support local financial institutions to develop and grow sustainable and scalable education loan portfolios.

New India Market Research  

With an estimated 32 million children out of school, the public sector has not been able to provide education to all of India’s school-aged population. Private education is filling part of that gap and the overall share of enrolments in private unaided schools (i.e. no public sector funding) has increased from 9% in 1993 to 33% in 2022. The pandemic had a devastating impact on the financial health of private schools, which were forced to remain closed for almost two years.  However, the fundamental drivers of growth in the sector remain: demand from parents who perceive a better learning environment in private schools, and the profitability of the private school. 88 million students are enrolled in 336,000 private unaided recognized schools in India. For this study, we chose the top five states which have the highest number of private schools: Uttar Pradesh, Rajasthan, Madhya Pradesh, Karnataka, and Andhra Pradesh/Telangana (which are considered as one state for the purposes of the study).

Key Findings  

Financial profile of schools

  • School fees are the main source of revenue for schools, on average making up 94% of total revenue.
  • 64% of schools said there had been no change in the level of school fees being charged over the past three years.
  • 61% reported collecting regular fees monthly. This move towards monthly fees (instead of annual or termly fees) reflects the increasing flexibility being shown by schools in the wake of the pandemic, which had a severe impact on parents’ livelihoods and income levels.
  • The research indicates that fee collection efficiency (defined as the percentage of parents who pay fees) has recovered to pre-pandemic levels of 89%.
  • About 20% of schools reported reduced enrolment over the last three years, the main reasons being the impact of Covid-19 on household finances and the migration of families.
  • On average, the schools we interviewed had 463 students enrolled and charged monthly fees of INR 1100 (USD 13.40) per child. Schools also reported charging one-off fees at the start of each academic year with an average amount of INR 3400 (USD 41.50) per child.
  • Salaries are the biggest expense for schools, making up 78% of total expenditure.
  • Most schools are built on self-owned land and only 21% reported paying rent.
  • Despite charging affordable school fees, due to low overheads and salary levels, schools can generate on average surpluses of 28% of their turnover.

Assuming a school is willing to spend 50% of its monthly surplus on loan repayments, a school with the above financial profile can afford equated monthly instalments - meaning a monthly fixed payment amount - of INR 85k (USD 1,040).

Demand for School Improvement Loans

Only 7.2% of schools reported taking a loan to fund school improvements in the past five years. Meanwhile, 41% said they would apply for a loan if available. The top reasons for wanting a loan were:

The average loan amount required was INR 23 lakhs (USD 28,000). However, 10% of schools wanted small loans of less than INR 5 lakhs (USD 6,000) for making small purchases and incremental improvements. Overall, this indicates there is a big gap in the market between supply and demand. Small loans would ideally be provided without the need for collateral, based on an analysis of school cashflows. The states of Uttar Pradesh and Madhya Pradesh had the highest percentages of schools wanting a loan at 61% and 57% respectively.

Demand for School Fee Loans

Parents reported an average monthly household income of INR 25,000 (USD 300), which supports the idea that private schools in India mainly serve low- to middle-income families. The breakdown of the families’ annual expenditure on education revealed that only 40% was spent on fees and 60% was on other related items such as books, uniforms, transport, etc. 16% of parents said they were interested in taking a loan to finance their children’s education, and the average loan amount required was INR 44,000 (USD 500). This is a lower percentage than what past research has suggested and may reflect the increased flexibility from schools now offering monthly fee payment options, which benefits families with cash flow constraints.

We also asked schools if they would be interested in partnering with financial institutions to provide school fee loans to parents. There are many benefits in such an arrangement for the school, such as being able to receive bulk fee payments upfront which increases their ability to plan for the school year and invest in strategic improvements. However, given the widespread availability of monthly fee payment options, these loans will only be attractive if the school is willing to offer a discount enough to offset the interest cost of the loan.  38% of schools said they would be interested in exploring partnerships, with schools in Andhra Pradesh/Telangana showing the most interest (62%).

Overall size of the education finance market in India

Based on the results of the market research and extrapolating these findings to the overall number of affordable private schools and children enrolled in such schools, we have estimated total market demand of USD 4.4 billion for education finance products in India. Assuming only 50% of demand will materialize, this gives a total market size of USD 2.2 billion (USD 1.05 billion for school improvement loans and USD 1.14 billion for school fee loans).

Low-cost private schools in India have been playing an important, yet unsung role, in reaching disadvantaged communities and meeting their educational needs. Yet they struggle to borrow from NBFCs and Banks to address their capital expenditure requirements.

The Indian Government and Reserve Bank of India should encourage financial institutions to avail benefits such as under the Priority Sector Lending (PSL) scheme and MSME credit guarantees to lend to schools.

Banks should consider co-lending with specialist education lenders to reduce the cost of borrowing for schools. Impact investors should also consider concessionary lending and outcomes-based funding to enable lending to the lowest fee schools in the most underserved geographies.”

-        Sakshi Sodhi, Technical Assistance Advisor, India

Breaking down financial barriers for the affordable education sector

The schools interviewed said the main challenges they face in accessing external finance are high-interest rates, difficulty in identifying financial institutions willing to lend to schools, and unsuitable loan products that do not fit their needs. To address high-interest rates, the sourcing of concessionary impact finance and/or credit guarantees is an urgent need in India. At Opportunity EduFinance, we are addressing two key barriers by providing technical assistance to financial institutions to design and market suitable loan products for the education sector.

Affordable non-state schools, while playing an important role in reducing the education deficit of the country, remain underserved by mainstream finance. The hesitancy amongst financial institutions partly stems from the perceived “higher risk” of lending to not-for-profit organizations such as schools. However, as this research demonstrates, well-run private schools can generate sufficient surpluses to take on loan finance and invest in increased capacity and improved quality of education, while maintaining affordable fee levels.

Through these insights, we hope to increase the level of confidence that the financial sector in India has in schools as a viable market segment and thereby close this education financing gap. 

Download the Market Knowledge Summary here to read more about this research.

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