The Credila Success Story

Education finance is a complex and dynamic sector.
There are too many variables -- the course, the calibre of students, the universities, and the job prospects once the course is over, notes Tamal Bandyopadhyay.

Hong Kong-headquartered BPEA EQT is acquiring HDFC Credila Financial Services Ltd, owned by Housing Development Finance Corporation Ltd (HDFC), for Rs 9,060 crore (Rs 90.60 billion).

This pegs HDFC Credila's valuation at Rs 10,350 crore (Rs 103.50 billion).

HDFC had to sell its education loan arm on the Reserve Bank of India's insistence.

It was one of the preconditions for approving the merger of HDFC with HDFC Bank Ltd.

Indeed, HDFC could have continued to own it for the next two years, but in that case, HDFC Credila would not have been allowed to take on new customers.

There were many suitors for HDFC Credila, including large private equity funds such as Blackstone, Carlyle, TA Associates and CVC Capital, and sovereign wealth funds including Abu Dhabi Investment Authority and Singapore's GIC.

BPEA EQT, in partnership with Indian PE firms ChrysCapital and Faering Capital, is buying a little over 90 per cent stake in the education financing firm. HDFC will retain a shade less than 10 per cent.

Two brothers, Anil and Ajay Bohora, had founded Credila in 2006.

In December 2019, the Bohora brothers exited and HDFC acquired their 9.12 per cent stake for Rs 395 crore (Rs 3.95 billion), valuing HDFC Credila at around Rs 4,330 crore (Rs 43.30 billion).

Since then, the company has grown by around 2.5 times in terms of its loan book and net worth.

HDFC Credila is the largest non-banking financial company (NBFC) on the education loan turf.

Since its inception, it has served at least 124,000 students pursuing higher education in India and overseas.

In FY23, its gross loan book was Rs 15,298 crore (Rs 152.98 billion), up 73 per cent in the past one year.

It posted a net profit of Rs 276 crore (Rs 2.76 billion) last year, maintaining a net interest margin of 4.2 per cent. And, its bad loans have never crossed 1 per cent of the loan book.

Its business model is quite unique.

Let's take a look at the genesis and the journey of India's first and largest private education loan lender.

In 2004, Ajay was attending a three-day structured finance conference at Boca Raton, Florida, in the US.

The conference featured a session on student loans, which, as an asset class, were worth over $700 billion in the US at that time.

Sallie Mae, a dedicated student loan-focused leader then, was disbursing billions of dollars of student loans every year.

Ajay holds a bachelor of engineering degree from the Veermata Jijabai Technological Institute, the University of Mumbai, and an MBA from Hofstra University, New York.

Anil is a graduate from the College of Engineering, Pune, and master of science from Ohio University.

Both had faced difficulties getting education loans to fund their studies in the US.

The conference proved to be a eureka moment for Ajay. He decided there and then to set up a student loan-focused specialised lender, something HDFC was doing for mortgages.

The model before him was Sallie Mae's, which not only offers education loans but also manages the career of the students.

Sallie Mae, originally the Student Loan Marketing Association, is a publicly traded US company in the consumer banking space.

Set up in 1972, it was initially a government entity that serviced federal education loans.

Post-privatisation, its primary business has been creating, servicing, and collecting private education loans.

It also provides online tools and resources for college planning.

In April 2014, Sallie Mae spun off its loan servicing operation and most of its loan portfolio into a separate, publicly traded entity called Navient Corporation -- the largest servicer of federal student loans.

It acts as a collector on behalf of the department of education.

Once the Bohora brothers managed to get the NBFC licence, they were able to convince Merrill Lynch to come on board as an investor.

Merrill Lynch's Indian outfit, DSP Merrill Lynch, became a 40 per cent equity partner in Credila with Ajay and Anil owing the rest.

But the Merrill Lynch association did not last long. It was taken over by Bank of America in the aftermath of the global financial crisis.

That's when HDFC stepped in to buy out the 40 per cent stake, and Credila became HDFC Credila.

Once HDFC acquired the stake, the quartet of Deepak Parekh, Keki Mistry, Renu Karnad and V S Rangan started handholding the Bohora brothers to create a technology-driven, cutting-edge education loan platform, and raising debt from the financial markets.

In the fiercely competitive business, the key to success is a disruptive business model.

And, the cost-to-income ratio can be kept low for sustained profitable growth only if it has the right technology platform.

Education finance is a complex and dynamic sector. The lenders need to understand the courses offered by different colleges in different universities across nations.

There are too many variables -- the courses, the calibre of the students, the universities, and the job prospects once the course is over.

It's challenging as lenders need to track not only the educational institutions but also the performance of the students.

HDFC Credila has designed education loan solutions where parents don't have to put in margin money.

Once a loan is approved, it offers the option to students and parents to get up to 100 per cent of the total cost of education, including living expenses, delivered at home. And, there is no limit for such loans.

The US has a total education loan outstanding of over $1.5 trillion, 100 times more than the education loan portfolio of all lenders in India, which has the largest pool of young population with at least 30 million students in tertiary education and another 25 million in K-12 (kindergarten to Class 12).

At least 700,000 students went overseas to study in 2022, the government's data shows.

The number will rise as institutions are increasing their student intake after the pandemic.

With the cost of education on the rise across the world and not many families able to afford self-funding, the sector is bound to grow.

A recent report of rater CARE Ltd says the NBFCs almost doubled their market share in retail education loans in the last two years -- from 9.9 per cent in September 2020 to 18.6 per cent in September 2022.

The retail education loan book of CARE-rated NBFCs more than doubled from Rs 7,738 crore in September 2020 to Rs 17,877 crore in September 2022, when the overall education loan book of all lenders was pegged at Rs 1.1 trillion.

In September 2022, the finance ministry called a meeting of public sector banks (PSBs) to take stock of the education loan portfolio and cut down on the delay in the sanctioning and disbursements of such loans.

The PSBs, which have around 90 per cent market share of education loans, are cautious in disbursing fresh loans since the bad loans in this segment have been on the rise.

These stood at 7.82 per cent for the banking sector in June 2022.

The CARE report says that owing to specialised credit underwriting skills, the asset quality of education loan NBFCs is better than that of banks.

It remained stable even during the difficult times of COVID-19.

Tamal Bandyopadhyay is a consulting editor at Business Standard. You can read his earlier columns here.

Feature Presentation: Aslam Hunani/Rediff.com