A Merit-Centric Approach to Education Financing: Why We Invested in Credenc

Sunita is from Rewari, Haryana where her father runs a small shop bringing home a modest income of Rs 24,000 per month. She had secured a spot at Acharya Institute of Technology in Bangalore through its competitive MBA program. She was excited to start her new journey which would end up with her a well-paying job and the ability to meaningfully improve her family's financial health. It was the result of many years of hard work. But she was dismayed when her loan application for tuition got turned down by multiple banks and financiers. Her application did not meet the underwriting requirements, which are based on the parental income of students, as opposed to the student's own merit or employability.

Unfortunately, Sunita's case is not an exception. For many others like her, even after getting an almost perfect score and acing essays and interviews, there remains a final hurdle, which, far too often, becomes insurmountable. It all comes down to securing an education loan.

There is a significant under-penetration of domestic higher-education loans in India as banks and NBFCs prefer lending to other sectors or international higher education. While the cost of higher education in India has been increasing, the total outstanding education loan book of banks has actually decreased over the years, which is lower by 2% compared to Aug 2018. Meanwhile, gross bank credit has increased by 10% during the same period.

This is a stumbling block for many deserving students simply because they have little control over it. As a result, the financial pressure of a student's education falls on their families, forcing them to take personal loans at significantly higher interest rates, liquidate family savings and assets. Many times, students are forced to choose a less expensive school which is often of lower quality or postpone their study plans and start working instead.

Ironically, high employability courses like MBA can significantly improve the financial health of those in the low-income populations and change their career trajectory. But when access to such education becomes restricted by the financial status of a student's family, it creates a vicious cycle of missed opportunities.

It is this pattern that Credenc is trying to break. Credenc aims to disrupt the education loans industry by changing the criteria for evaluating applicants for education loans and enabling alternate credit scoring models that are related to the student's merit and aptitude, such as test scores and academic records, rather than parental income.

Credenc is currently focusing on MBA students which is a significant market in itself. Just taking colleges from tier 2 and 3 cities into account, there exists an annual lending opportunity of Rs 14,000 cr (US$2bn). Eventually, the company plans to extend its services to other professional courses as well.

While the marketplace model will remain central to its operations, Credenc is also entering into lending relationships whereby the loans will be originated and underwritten by Credenc but will be on the books of the original lender. Subsequently, the risk, as well as the income and profits, will be shared between the company and the lender.

We are excited to partner with Avinash Kumar and Mayank Batheja, and supporting their vision of democratizing high-quality education. We believe Credenc is playing a pivotal role at the intersection of finance, education and enhancing employability. By providing access to funding, Credenc is giving deserving aspirants like Sunita a chance to seek higher education and forge a path for themselves, solely on their own merit.