In today’s Finshots, we explain why international private equity firms are interested in the Indian education loan business.

The Story

Imagine going to a bank in 2005 and trying to fund your education. Your best bet was to visit a public sector bank and appeal your case. Explain to the manager and the bank why you need to borrow money. They’d evaluate your care objectively for the most part. They’d seek supporting documents and sanction a loan almost immediately if the sum wasn’t substantial. Only large loans called for a guarantee. Banks ruled this space.

Until Ajay Bohora emerged onto the scene.

Now according to BQPrime, the story goes something like this — Bohora was at a conference in the US in 2005 and people here couldn’t stop talking about the private student loan market. The opportunity in the US was massive. It ran into hundreds of billions of dollars. And Bohora thought, “Well, we have over a billion Indians. The opportunity just seems bigger back home.”

So he got his brother onboard and began laying the groundwork. They realized that banks weren’t getting a lot of things right. They were just doling out loans to everyone with little due diligence. And they knew this would bite them back someday. The brothers wanted to be on the scene when this happened. And they wanted to build a more robust business that could leverage this opportunity. So, Credila Financial Services was born in 2006.

But they didn’t want to go on this mission alone. They wanted a partner. They got DSP Merrill Lynch on board the very next year. But the partnership didn’t last long. Why?

Well, because in 2008, we witnessed the global financial crisis and banks such as Merrill Lynch collapsed. That’s when HDFC saw an opportunity. It had made a name for itself by starting off as a dedicated home loan player. So why not buy another financial services company that focused just on education loans?

It made sense. So HDFC jumped in and bought out the stake. It valued Credila at ₹50 crores. And slowly but surely, the bank kept increasing its ownership until it turned full owner in 2019.

The Bohoras exited.

But HDFC couldn’t really enjoy its stint as the full owner for long. Because last year, the housing finance company decided to merge itself with its banking counterpart HDFC Bank. While approving the merger, the Reserve Bank of India asked HDFC to pare its stake in the education loan business. The ultimatum was to sell at least 90% of the business within 2 years.

So HDFC put out some feelers. Asked if anyone was interested. And the suitors lined up. Everyone wanted a piece of the Indian education loan behemoth.

And a couple of days ago, the winners finally emerged — a consortium of private equity players BPEA EQT and ChrysCapital. They’re taking Credila off of HDFC’s hands and valuing the company at over ₹10,000 crores. That makes the education loan company a nearly $1.25 billion unicorn.

Now HDFC will be pretty pleased with the outcome. Because if we’re being honest, it was a ‘nice-to-have’ sort of business. It wasn’t really a big money spinner for HDFC. For instance, the brokerage Prabhudas Lilladher noted that only 0.5% of HDFC’s business value could be attributed to Credila. That’s not much at all.

So why are investors falling over each other to buy Credila then, you ask?

For starters, there’s the macro picture.

Just think of this. As of FY21, nearly 40 million Indian students were enrolled in higher education courses across UG, PG, and diploma programmes. But if you look at the Gross Enrolment Ratio — a metric to see what percentage of students are enrolled as compared to the eligible population in the 18–23 age group — you’ll see a pretty low figure of 29%. For context, it’s 58% in China and 88% in the US.

Now we can hope that as disposable income rises in the country, the ambition of young India soars alongside it. The bet is that we’ll see Gross Enrolment Ratios trend upward too. And when it does, millions of students will need to borrow money to realize their dreams.

Also, Indian students are increasingly flocking overseas. We have nearly 800,000 students studying abroad. And according to some estimates. this figure is expected to double over the next couple of years.

So, financial service firms who dole out education loans could benefit too. And it’s no wonder then that we’ve seen a proliferation of digital-first loan providers of late — such as Leap Finance backed by Sequoia (now Peak XV Partners) and Eduvanz backed by Tiger Global Management.

Then there’s the micro picture.

As we have noted, banks have made quite a hash of the education loan business. Nearly 7–8% of these loans turn bad. So they’ve grown wary and they’re actually dialling back on education loans

This has created an opportunity for the likes of HDFC Credila. These folks currently command nearly half of all education loans doled out by the non-banking channel. And that’s saying something. Also, the kicker is that HDFC Credila has done a pretty decent job at controlling defaults. Their bad loans are at a puny 0.12%. Despite the fact that nearly 75% of their education loans don’t have any collateral backing it. And they’re also digitizing their operations to keep up with new-age competition.

So yeah, you can see why private equity investors would be quite interested in India’s first pure-play education loan firm even now. It’s a proven model, unlike the other startups in the space. And they’ll still get the might of the HDFC group which will continue to hold a 10% stake in the company. They’re keeping their skin in the game. And that itself is a great indicator of what the future could hold for the company, no?

Until then…

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