Role Of Private Capital In Promoting Affordable Education
Affordable private schools need finance to keep up with the increase in working capital expenditure with a growing number of enrolments.
India is a young country with a median age of 27 with a quarter of the country’s population of school-going age. Over the next ten years, more than 300 million children are expected to enter the school system. A majority of students in India are enrolled in government schools.
Some of the indicators of good quality education include healthy student to teacher ratio, availability of qualified teachers, adequate number of desks, access to playgrounds and good academic pass rates. Unfortunately, a large percentage of government schools in India do not fare well on these parameters.
Government spending on education, at 3.8 per cent of GDP, is significantly lower than in other large economies. Many government schools lack basic infrastructure such as desks, blackboards, libraries and playgrounds. A recent study across 13 states in India revealed that more than a third of the schools lack functioning toilets. Lack of serviceable toilets contribute to greater absenteeism and high drop-out rate of students, particularly girls. The K-12 segment in India witnesses close to 45 per cent drop out rate. Government schools also suffer from teacher absenteeism and poor quality of instruction. With the Centre and the State governments continuing to be constrained in budgets for improvements in education infrastructure, it is unlikely that the quality of government schools will improve in the near-term.
Over the last decade, affordable private schools (APS) have emerged as a superior alternative to government schools. APS charge monthly tuition fees in the range of Rs 550 to Rs 3,500. More than 110 million children are enrolled in private schools (2015-16, U-DISE). This number is expected to increase multi-fold over the next few years. India has approximately 700,000 APS and the number is expected to continue to grow. Unfortunately, these schools face their own set of challenges.
APS need finance to keep up with the increase in working capital expenditure with a growing number of enrolments. Staff salaries and other operating expenses increase as the operations expand. Additionally, to provide high-quality education, these schools need to upgrade their infrastructure and invest in areas such as science labs and computer labs.
APS struggle to raise third-party financing. Banks and non-bank finance companies (NBFCs) are reluctant to lend to APS since they are organized as not-for-profit businesses. With limited formal financing options, APS either end up borrowing from local moneylenders at exorbitant interest rates or end up compromising on the quality of infrastructure and teaching resources.
Many APS are run by entrepreneurs passionate about the education sector but with little experience in business management. These entrepreneurs need mentorship, support to professionalize operations and knowledge on leading practices to assess and improve education outcomes.
With the reduction of poverty in India, a new segment of low-income families has emerged who aspire to enrol their children in private schools for better quality education. These families recognize that high-quality education is a pathway to a white-collar job. They struggle with the cash flows to finance the lump sum payments of tuition fees demanded by APS. Many of these families work in informal sectors as carpenters, drivers and care providers and seldom have documented income, deterring their access to a formal source of finance. In the next decade, the number of families able to afford low-cost private schools for their children’s education is expected to increase by 36 per cent.
India’s education infrastructure needs timely capital to improve the quality of its assets and families aspiring to provide quality education to their children need access to better financial services. Fortunately, the private sector is stepping up to address this gap in the market and innovative finance companies have emerged in the last few years.
The new companies use innovative underwriting methods to issue a credit to the growing and deserving education sector. These companies provide loans to APS for financing capital expenditure requirements such as the establishment of libraries and science labs, purchase of computing equipment, expansion of school building and working capital. The use of alternate data in underwriting loans enables access to formal finance for low-income families with undocumented income.
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