Saturday, January 1, 2011

In Credit(ble) India

I was reading 'The week' anniversary edition. It had a cover story on 'Incredible India'. The cover story pointed out the obvious anomalies in India. For example the tele-density in India is greater than toilet density! and Pizza arrives within 30 minutes while ambulances seldom reach on time. Yes , it makes for fascinating reading.The article is very relevant as we would have experienced them hands-on at some point of time and can connect with it.

One of the things which got me thinking was 'Car loans are cheaper than education loans' in India. The article further goes on to explain the reasons behind this. This is possible because car manufacturers subsidize the loans and there is a collateral in the form of the car. Now , how do we subsidize education loans? The article suggests the government could subsidize education loans. Good. Agreed. But do all of those promised 'goods' ( both literal and contextual) the government promises reach us. My intention here is not to point fingers but to understand what would be practical. OK, we assume that the government is indeed capable of delivering and it subsidizes the loan to some extent. But ,without the collateral our bankers would still have to charge higher interest rates.

Ok , the bankers decide let us bring in a 'repaying capacity' based interest rate policy. The higher your repaying capacity the lower your interest rate. What an idea sir ji! The bankers would get hit as implementing such a scheme is an operational night mare. India does not have all its data digitized to make this a reality. Now, we have to find someone who can subsidize and also find a collateral in this case. Why don't the corporates who recruit subsidize the education loans? Why should the corporate subsidize? Let us understand who benefits from the loan. Yes of course the student, the parents , the educational institute (indirectly the government) and the entity which employs him. The student and the parents have to repay the loan . The educational institute provides its services for the fees paid. Some of them also have scholarships . They also play their part (of course this can be questioned). Assuming that you need that money to provide quality education we will leave the universities here. That leaves us with the corporates . How are the corporates helping. Yes , they pay the salaries. They recruit people who fit and pay them salaries.

Now , imagine if there is a change in how the corporates see this. The corporates pay the educational institutes to identify and groom talent. This would subsidize the educational expenses for the students. The corporates would also get better and fit candidates. Where would the corporates get this money? The banks would finance them with loans. How would the corporates pay the loan back? They would allocate part of the Salary they pay to the talent they recruit. The corporates would play the part of both subsidizing and being a collateral.

That seems like a feasible and viable solution. But if as a corporate I do this and the person leaves and joins another company. How would this work? As an industry we come together and form this educational pool. As long as the person remains in this industry it would work. If a person moves to an other industry which has not opted for this, then it would stop and the burden of the loan would be on the individual but now he/she has job which pays and the person can be traced

Yes, this is a bold idea. Yes, we don't know whether it would work. On paper , it seems to be good. Is anyone ready to test this out?

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