Opportunities for Developing Private Student Financing Programs

1
Opportunities for Developing Private Student
Financing Programs

• Presentation at the IFC Conference, Cote dIvoire
• December, 1999

2
Presentation Flow

• Higher Education in India Need for finance
• Student segments in India
• Citibank Indias programs
• Proposed Program with IFC NIIT

3
Government Spending on Higher Education
Source Budgetary Resources for Education, HRD
Ministry
4
Govt. expenditure on Scholarships
Source Journal of Indian School of Political
Economy
5
India vis-à-vis Role Models
Source UNESCO (1994)
6
Educational Institutions in India
7
Citibanks Approach
8
Segmenting the Student Market

• Payback Ability of Student Reputation of the
  Institute resulting in differences in placement
  options, resulting in different abilities to
  repay the loan
• Tier 1
• Tier 2

• Costs of the Program Funding Source of the
  Institute leading to differences in cost of the
  program
• Government-funded
• Private

9
Identification of Profitable Segments
1 Medicine - Grad - Priv 2 Mngt - Grad -
Gov/Priv - Tier I 3 Medicine - Undergrad -
Priv 4 Engr - Undergrad - Gov - Tier I 5 Dental
- Undergrad - Priv 6 Engr - Undergrad - Priv -
Tier II 7 Engr - Undergrad - Gov - Tier II 8
NIIT - Ungergrad -Priv 9 Medicine - Undergrad
- Gov 10 Arch - Undergrad - Gov/Priv 11 Dental -
Undergrad - Gov 12 Arch - Grad - Gov/Priv 13
Medicine - Grad - Gov 14 Engr - Grad -
Gov/Priv 15 ACS - Grad - Priv 16 ACS - Undergrad
- Priv 17 Mngt - Grad - Gov -Tier II 18 Mngt -
Grad - Priv - Tier II 19 ACS - Grad - Gov 20 ACS
- Undergrad - Gov
400,000
1
3
5
300,000
200,000
2
18
6
Avg. Cost for Education
10
4
7
100,000
.
17
9
12
. 11
16
8
13
15
14
19
20
100
200
300
Payback Ability
Bubble size is proportional to of students
10
Profitable Segments
Targeted (180,000)
The 8 most attractive segments enroll 180,000
students annually (8 of entire market).
Other (1,900,000)
11
Profitable Segments
The eight most attractive segments have a total
value of over Rs 24 MMM (US 564 MM), approx.
25 of entire market.
Targeted (24 billion)

Other (70 billion)
12
Citibank Indias programs
13
Citibank Indias Program

• Existing Funding students in Tier 1 Business
  schools
• Proposed Financing graduate computer education
  
• Identified partner - NIIT
• Implementation Date November 1999

14
Business School Program

• Funding 100 of institute expenses incidental
  living expenses
• No payments during study period
• Repayment commences 6 months after graduation -
  up to 5 year tenor
• Pre-approved credit / debit cards

15
Business School Program

• Test pilot in Indian Institute of Management,
  Bangalore - in end 1998
• Rolled out to other institutes in phased manner
  from Q2 1999

16
Proposed Program IFC, NIIT Citibank
17
Rewarding Relationship
IFC
Citibank
NIIT
A unique model, which brings the strengths of
each of the three institutions into a profitable
partnership.
18
NIIT

• NIIT offers a chance to explore an alliance with
  a non-traditional higher education institute with
  relative low costs but rapid student growth.

19
The NIIT Model

• Pros -
• Private commercial institution interested in
  forming alliance to target its students
• Potential for exclusive agreement
• May eliminate some of the administrative burden
• 50,000 students enroll annually and rapid growth
  expected
• 100 placement with starting salary of over Rs
  100,000 (US2350) per annum

• Cons -
• Low cost per student, although many do this
  concurrently with an undergraduate program
• Administration costs compared to loan size might
  be high unless NIIT shares the burden

20
Structure of Loan

• Loan disbursed directly to NIIT
• Screening of students
• Scholastic scores
• Interview to gauge seriousness level
• 20 equity from the student (co-payment)
• Additional Security Guarantee from Parent /
  Guardian without burden of proof of income

21
Loan Repayment

• Months 1-24 No payments
• Months 25-36 Only interest Servicing
• Months 37-84 Equated Installments for
  Principal Interest
• These are minimum repayments, Students have
  flexibility of accelerated repayment

22
Students Cash Flows
Repayment amounts are fixed, while income levels
would increase
23
Key Risks Mitigants

• Risk of Student discontinuing the program
• Mitigant Students equity Pre-screening
• Inability to get appropriate placement
• Mitigant Prospects of software industry and
  demand for qualified professionals
• Emigration of student overseas / Skip risk
• Parents guarantee

24
Risk Measurement Risk Sharing
25
Philosophy of the program

• Modelled along classical securitisation programs
• 1st level of Risk - Originator/Servicer
  (Citibank)
• 2nd level of Risk - NIIT
• 3rd level of Risk - IFC
• 4th level of Risk - Investor in ABS

26
Risk Sharing
27
Role of NIIT

• Administrative support to the program
• Report on Student discontinuing the program
• Academic progress of students
• Details of placement for collection follow-up
• Credit risk sharing to the extent of 5 (2nd
  level, after Citibank)

28
Role of IFC

• Provide expertise to evaluating lending risks
• Absorbing third level Credit loss in return for
  fee earnings
• Total program level cap
• Work on regulatory agenda to develop funding
  sources (securitisation, tax-free bonds etc.)

29
Modeling the Program
30
Program Model

• Penetration Assumption 25
• Portfolio after 60 months Rs 320MM (US 47MM)
• No. of Students Financed 55370

31
Estimating Credit Losses

• Key Assumptions to be made
• Extent of Credit Losses on the portfolio
• Distribution of Credit Losses over time

32
Extent of Credit Losses

• Citibank does not have a Student Loan program in
  India
• Possible benchmark could be the Personal Loans
  Program (credit losses 125 bps)

33
Comparison with Personal Loans Behaviour

• Similarities
• Debt-burden ratios alike
• Unsecured finance
• Differences
• Personal Loans are for Consumption expenditure
• Student Loans have parent as guarantor
• Personal Loans are based on existing cash flows
  of the borrower

34
Loss Impact at Varying Loss levels
35
Distribution of Credit Losses over Time

• Personal Loans - loss pattern emerges after a lag
  of 12-15 months
• Timing of losses is important because
• Absolute amount changes as principal runs off
• Rupee depreciation changes losses in US terms
• Time value of gains/losses

36
Distribution of Credit Losses over Time (contd.)

• Months 1-24 no payment, only losses are on
  account of dropouts
• Months 24-36 Interest servicing, front-ended
  the losses during this period
• Months 37-84 Normal distribution

37
Profitability Model

• For Citibank
• Earnings benchmarked at 50 of unsecured
  lending programs
• Upside from x-sell opportunities
• For NIIT
• Second level risk
• Alternative to the scholarship program
• Margins from greater demand
• Ability to take the program global

38
Profitability Model for IFC

• Entry into commercial insurance business
• Commensurate risk-reward for the program
• Upsides from participation in social sector

39
IFC Payoff
40
Other Key Objectives

• Influence regulatory change
• Govt spending on higher education to take the
  form of credit insurance (as opposed to subsidy)
• Tax deduction on interest payments
• Improved legal process for collection - employer
  deduction mandatory

41
Other Key Objectives (contd.)

• Developing the student loan market
• Setting conformance standards
• Attracting other market participants
• Developing cheaper funding sources -
  securitisation, tax-free bonds etc.

42
Other Key Objectives (contd.)

• Developing the International market
• NIIT offers educational programs in East Africa,
  China and South Asia
• Citibank willing to assist in modeling the
  program in other African countries

43
Thank You