-By Jesselyn Friley, Lucinda Gibbs, Katherine Hoffmann, Robert Toews, Damilola Sobo and Zachary Hoberg, Stanford University
At the beginning of the summer, the six of us Stanford summer interns set out to determine, through field interviews and market research, if there was a viable gap in the higher education loan market in Thanjavur that KGFS might productively fill by offering its own education loan product, thereby allowing more low-income students to pursue higher education. With the help of colleagues from IFMR Ventures and Tamil-speaking researchers from the InnerWorlds team, we began a unique research project that would take us into rural villagers’ homes, bustling bank branches and college campuses across Thanjavur district. Now that our last day in Chennai has arrived, we take this opportunity to summarize our experience and some of our discoveries.
On our first research trip to Thanjavur district, we conducted interviews with secondary school administrators, college principals, students, and bank managers within the city of Thanjavur and nearby areas. As a result of these interviews, we found ourselves somewhat discouraged as to the need of a KGFS higher education product. This discouragement stemmed, above all, from our discovery that commercial banks were mandated by the Tamil Nadu government to extend higher education loans to all deserving students, without collateral, for amounts up to 4 lakh rupees. Moreover, the mandate had recently been expanded such that students did not have to pay interest on the loans while enrolled in college. Given this mandate, as well as the existence of many government scholarship programs, it seemed to us that the introduction of a KGFS product might be unnecessary. After all, students–including low-income ones who did not have collateral–could simply avail a relatively low-cost education loan at a commercial bank if they needed one, and would not even have to pay interest on it for a few years.
However, upon returning to Thanjavur for a second round of research interviews, this time focusing more on the small villages in the surrounding area, we began to uncover gaps in the loan disbursal process that increasingly indicated the value of developing a new loan product. To begin with, we found that even though banks were required by law to extend these education loans, they tended to “hesitate” on doing so. They frequently delayed approving loans to low-income individuals for as long as possible, through such methods as continually requesting more paperwork from applicants.
In our interviews with students we found that these delays frequently lasted several months, often forcing their families to resort to higher cost financing options. In our discussions with bank managers, they were very frank with us about the reason for the banks’ attitude: repayment rates for educational loans are very low in Thanjavur district and across India, often coming in at between 50% and 60%. Though banks are compelled to offer these education loans because of the government mandate, they are simply not good business for the banks. Another consideration that we encountered is that there are significant costs associated with pursuing a higher education on top of tuition, which is the only cost that many bank loans and government scholarships cover. These additional costs include, but are not limited to, housing, college “donation” fees, transportation, school supplies, and the opportunity cost of foregoing entry into the labor force.
We returned to IFMR headquarters in Chennai and, after a lot of research and many brainstorming sessions, we designed a menu of loan products that we believe address many of the constraints to financing higher education that we encountered through our field research in Thanjavur. These products include a bridge loan, to be disbursed to families waiting for an education loan from the bank to be disbursed; a supplemental loan, to cover a student’s costs other than tuition; and a savings program. We also explored various ways to increase repayment rates and ensure the financial sustainability of these products.
We believe that KGFS’s unique position within the social structure of villages gives it a marked advantage over commercial banks when it comes to encouraging repayment. Finally, we put forth a proposal for the establishment of an independent education office within villages, which would be charged with the duty of raising awareness about the requirements, financial and otherwise, of higher education planning. We believe such an education office would contribute enormously toward the goal of increasing the number of low-income villagers who decide to pursue a higher education, and address the principal challenge that we identified in our field research: an information gap regarding financial and educational opportunities. We hope that at least some of the suggestions in our final report will prove useful for KGFS and can be developed into financial instruments to be offered to students in Thanjavur, allowing more of them to pursue a higher education and ultimately secure employment.
As we return to Stanford to complete our own higher educations, we will bring with us fond memories from our field research–including playing cricket and eating fantastic home-cooked meals in villagers’ homes, and working with a truly inspiring and diverse team of IFMR colleagues. We are all grateful to have gained a greater understanding of rural India and of the role of finance in reducing poverty. We look forward to following the progress of KGFS’s higher education products and other IFMR projects in the future.
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