First, a public acknowledgment of my getting back on the horse after a long time. I started the Edtech B.E.T. newsletter a while ago and faded out just after a couple of posts. The original intent of the newsletter is listed here.
As I get back to writing, my realization is that I need to write more to get better at it. Hopefully, I stay true to the realization. This post is Business related (the B of B.E.T) - see more here for the type of content that this blog deals with.
So without any further adieu, to today’s topic. The EdTech Loan Mela (a.k.a. Fair). Recently, the Ken reported in EdSetGo that “Fintech fails, courtesy edtech”.
They talked about the fact that edtech allowed fintech to fatten loan disbursement stats and asked the question on what happens when edtechs being to fail their promise (of loans being returned).
First, it reminds me of HDFC bank. I interviewed with them many moons ago and the interviewer amongst other things asked me about my life as a kid, which car did we have then (we didn’t), and what did we do if a relative visited and the entire family + visitor had to go to a movie/nearby market for a chaat with just one scooter.
(For international readers HDFC bank is India's largest private sector bank by assets and the world's 10th largest bank by market capitalization as of April 2021 - Source: Wikipedia)
HDFC bank has been quoted as a very conservative lender like in this Reuters article and acclaimed as a fast-growth bank for years. Indeed very tough to balance both risk and growth, especially over the short term. In their own words to me, their job is to cut risk, recover money, attract cheaper capital and hence keep the lending business going. Their NPA stood at 1.17% of gross advances on March 31, 2022. Source. That’s much lower than the industry average. Perhaps none of the employee's families owned more than a scooter back in the day. I, however, never made it through the interview.
Let’s switch gears to the fintech players. Funded by VC capital, led by the dreams of growth hacking, experimenting first discovering later - all traits of startups. EdTech definitely had to be a channel of interest for them, given the high ticket value, high volume of disbursements, and after all its money spent to get better outcomes so logically a high payback right?
So what went wrong? Let’s dig in through a story loosely translated from memory.
Two neighboring countries were in a long war (almost not called a war) and this gentleman cadet was missing home - he would get letters from his wife who he had married just a few months ago - and he would of course approach his CO (commanding officer) for leave but get turned down.
Until one day the CO asked him to get him an enemy tank. He left and he did return with an enemy tank. He got his reward, a full 3-week leave. This became a routine and he repeated this. The third time, when he came back from his vacation the CO asked him how he does it each time without failure? The cadet simply replied ``I take my own tank to the enemy lines, wave a white flag, and ask "Anybody else looking for a long leave?"
The story is of course fictional but all of us who have worked in corporate lives have given a chuckle post reading it.
There has been a symbiotic relationship between many industries in the past but valuation has been the common factor that has brought the fungus and tree together, in the case of Fin and EdTech.
Which one is which, it's very tough to tell. Did they know? Of course, they did. Did they talk about it? Of course, they didn't.
To be fair, many EdTech players have been turned down by some FinTech players, for such risk. There are others who have piloted the creditworthiness of a certain product being financed, by testing if EMIs are coming back and what the default rate is. Both sound approaches. But yes many others have just chased AUM despite the risk.
The data proves itself; in higher education (where arguably, the outcome is more tangible), the terminology is clearer (loan partner, EMI, tenure, etc.), and the loan application is online - defaults are next to none.
Latest screen grabs from websites of upskilling players. One of whom is my past employer and I was responsible to approve the final language that goes on the website, customer communications, sales pitches, etc. At no point did the loan not sound like a loan.
This doesn’t mean that all Higher Ed players are above board, or that all K12 players are not above board but in many cases in K12 (where outcome perception is related to marks), there are tales of two towns for terminology and application process - defaults are much higher.
The prognosis is clear - at least to me, having seen both sides of the story where consumers have access to credit and where they don't - financing provides access to a whole lot more people. This is important because the learners and parents (in case of K12) are left on their own. I have (as part of my corporate jobs in the past) made representations to the government to make skilling, and supplementary education tax-deductible (if we can't do a mass skill voucher like Singapore). After all, it is the taxpayers who give more tax if their income is protected or they are empowered to increase their income, or happiness/generational income (in the case of K12)
The trouble is there are certain segments and certain players who have exploited the system, but let's not throw the baby out with the bathwater. Calling loans bad for EdTech is going to do just that. The key question to ask is if the defaults are new? or have they been around the last 3 - 4 years, if yes then what has been done about it? By NBFCs, RBI, and also what about the VCs who have provided all this loan liquidity?
Image Source: How to brush a crocodile’s teeth
Hope you enjoyed this post; let’s turn it into a dialogue. You can find me on Twitter, LinkedIn and I would really appreciate the support if you can share this post with others - it will help me put more efforts into my writing and be back with more engaging posts soon.