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Opportunities for Developing Private Student Financing Programs

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Citibank India's programs. Proposed Program with IFC & NIIT ... Funding Private Higher Education in India - a Citibank Presentation ... Citibank. IFC. NIIT ... – PowerPoint PPT presentation

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Title: Opportunities for Developing Private Student Financing Programs


1
Opportunities for Developing Private Student
Financing Programs
  • Presentation at the IFC Conference, Cote dIvoire
  • December, 1999

2
Presentation Flow
  • Higher Education in India Need for finance
  • Student segments in India
  • Citibank Indias programs
  • Proposed Program with IFC NIIT

3
Government Spending on Higher Education
Source Budgetary Resources for Education, HRD
Ministry
4
Govt. expenditure on Scholarships
Source Journal of Indian School of Political
Economy
5
India vis-à-vis Role Models
Source UNESCO (1994)
6
Educational Institutions in India
7
Citibanks Approach
8
Segmenting the Student Market
  • Payback Ability of Student Reputation of the
    Institute resulting in differences in placement
    options, resulting in different abilities to
    repay the loan
  • Tier 1
  • Tier 2
  • Costs of the Program Funding Source of the
    Institute leading to differences in cost of the
    program
  • Government-funded
  • Private

9
Identification of Profitable Segments
1 Medicine - Grad - Priv 2 Mngt - Grad -
Gov/Priv - Tier I 3 Medicine - Undergrad -
Priv 4 Engr - Undergrad - Gov - Tier I 5 Dental
- Undergrad - Priv 6 Engr - Undergrad - Priv -
Tier II 7 Engr - Undergrad - Gov - Tier II 8
NIIT - Ungergrad -Priv 9 Medicine - Undergrad
- Gov 10 Arch - Undergrad - Gov/Priv 11 Dental -
Undergrad - Gov 12 Arch - Grad - Gov/Priv 13
Medicine - Grad - Gov 14 Engr - Grad -
Gov/Priv 15 ACS - Grad - Priv 16 ACS - Undergrad
- Priv 17 Mngt - Grad - Gov -Tier II 18 Mngt -
Grad - Priv - Tier II 19 ACS - Grad - Gov 20 ACS
- Undergrad - Gov
400,000
1
3
5
300,000
200,000
2
18
6
Avg. Cost for Education
10
4
7
100,000
.
17
9
12
. 11
16
8
13
15
14
19
20
100
200
300
Payback Ability
Bubble size is proportional to of students
10
Profitable Segments
Targeted (180,000)
The 8 most attractive segments enroll 180,000
students annually (8 of entire market).
Other (1,900,000)
11
Profitable Segments
The eight most attractive segments have a total
value of over Rs 24 MMM (US 564 MM), approx.
25 of entire market.
Targeted (24 billion)

Other (70 billion)
12
Citibank Indias programs
13
Citibank Indias Program
  • Existing Funding students in Tier 1 Business
    schools
  • Proposed Financing graduate computer education
  • Identified partner - NIIT
  • Implementation Date November 1999

14
Business School Program
  • Funding 100 of institute expenses incidental
    living expenses
  • No payments during study period
  • Repayment commences 6 months after graduation -
    up to 5 year tenor
  • Pre-approved credit / debit cards

15
Business School Program
  • Test pilot in Indian Institute of Management,
    Bangalore - in end 1998
  • Rolled out to other institutes in phased manner
    from Q2 1999

16
Proposed Program IFC, NIIT Citibank
17
Rewarding Relationship
IFC
Citibank
NIIT
A unique model, which brings the strengths of
each of the three institutions into a profitable
partnership.
18
NIIT
  • NIIT offers a chance to explore an alliance with
    a non-traditional higher education institute with
    relative low costs but rapid student growth.

19
The NIIT Model
  • Pros -
  • Private commercial institution interested in
    forming alliance to target its students
  • Potential for exclusive agreement
  • May eliminate some of the administrative burden
  • 50,000 students enroll annually and rapid growth
    expected
  • 100 placement with starting salary of over Rs
    100,000 (US2350) per annum
  • Cons -
  • Low cost per student, although many do this
    concurrently with an undergraduate program
  • Administration costs compared to loan size might
    be high unless NIIT shares the burden

20
Structure of Loan
  • Loan disbursed directly to NIIT
  • Screening of students
  • Scholastic scores
  • Interview to gauge seriousness level
  • 20 equity from the student (co-payment)
  • Additional Security Guarantee from Parent /
    Guardian without burden of proof of income

21
Loan Repayment
  • Months 1-24 No payments
  • Months 25-36 Only interest Servicing
  • Months 37-84 Equated Installments for
    Principal Interest
  • These are minimum repayments, Students have
    flexibility of accelerated repayment

22
Students Cash Flows
Repayment amounts are fixed, while income levels
would increase
23
Key Risks Mitigants
  • Risk of Student discontinuing the program
  • Mitigant Students equity Pre-screening
  • Inability to get appropriate placement
  • Mitigant Prospects of software industry and
    demand for qualified professionals
  • Emigration of student overseas / Skip risk
  • Parents guarantee

24
Risk Measurement Risk Sharing
25
Philosophy of the program
  • Modelled along classical securitisation programs
  • 1st level of Risk - Originator/Servicer
    (Citibank)
  • 2nd level of Risk - NIIT
  • 3rd level of Risk - IFC
  • 4th level of Risk - Investor in ABS

26
Risk Sharing
27
Role of NIIT
  • Administrative support to the program
  • Report on Student discontinuing the program
  • Academic progress of students
  • Details of placement for collection follow-up
  • Credit risk sharing to the extent of 5 (2nd
    level, after Citibank)

28
Role of IFC
  • Provide expertise to evaluating lending risks
  • Absorbing third level Credit loss in return for
    fee earnings
  • Total program level cap
  • Work on regulatory agenda to develop funding
    sources (securitisation, tax-free bonds etc.)

29
Modeling the Program
30
Program Model
  • Penetration Assumption 25
  • Portfolio after 60 months Rs 320MM (US 47MM)
  • No. of Students Financed 55370

31
Estimating Credit Losses
  • Key Assumptions to be made
  • Extent of Credit Losses on the portfolio
  • Distribution of Credit Losses over time

32
Extent of Credit Losses
  • Citibank does not have a Student Loan program in
    India
  • Possible benchmark could be the Personal Loans
    Program (credit losses 125 bps)

33
Comparison with Personal Loans Behaviour
  • Similarities
  • Debt-burden ratios alike
  • Unsecured finance
  • Differences
  • Personal Loans are for Consumption expenditure
  • Student Loans have parent as guarantor
  • Personal Loans are based on existing cash flows
    of the borrower

34
Loss Impact at Varying Loss levels
35
Distribution of Credit Losses over Time
  • Personal Loans - loss pattern emerges after a lag
    of 12-15 months
  • Timing of losses is important because
  • Absolute amount changes as principal runs off
  • Rupee depreciation changes losses in US terms
  • Time value of gains/losses

36
Distribution of Credit Losses over Time (contd.)
  • Months 1-24 no payment, only losses are on
    account of dropouts
  • Months 24-36 Interest servicing, front-ended
    the losses during this period
  • Months 37-84 Normal distribution

37
Profitability Model
  • For Citibank
  • Earnings benchmarked at 50 of unsecured
    lending programs
  • Upside from x-sell opportunities
  • For NIIT
  • Second level risk
  • Alternative to the scholarship program
  • Margins from greater demand
  • Ability to take the program global

38
Profitability Model for IFC
  • Entry into commercial insurance business
  • Commensurate risk-reward for the program
  • Upsides from participation in social sector

39
IFC Payoff
40
Other Key Objectives
  • Influence regulatory change
  • Govt spending on higher education to take the
    form of credit insurance (as opposed to subsidy)
  • Tax deduction on interest payments
  • Improved legal process for collection - employer
    deduction mandatory

41
Other Key Objectives (contd.)
  • Developing the student loan market
  • Setting conformance standards
  • Attracting other market participants
  • Developing cheaper funding sources -
    securitisation, tax-free bonds etc.

42
Other Key Objectives (contd.)
  • Developing the International market
  • NIIT offers educational programs in East Africa,
    China and South Asia
  • Citibank willing to assist in modeling the
    program in other African countries

43
Thank You
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