A Surprising Social Infrastructure Story: Indian School Finance Company (ISFC)

Our third unconventional meeting in unconventional Hyderabad was about another under-the-radar urban built infrastructure solution – schools. In this case, private schools are on the move in India – 60,000 of them in India and 3,000 in Hyderabad – and low cost schools are growing fast in line with the rapid growth of India’s cities.

Enter the Indian School Finance Company to extend loans to private low cost schools in India. The ISFC was capitalized two years ago by Grey Ghost Capital to help drive this growth. David Kyle, CEO of ISFC, and alum of Citigroup and the Acumen Fund, shared the organization’s perspective on the strong demand among schools for these loans and their planned expansion to Bangalore.

ISFC’s mission to promote high quality, low cost education and financial institutions that cater to the base of the pyramid already speaks for itself, but what we found especially exciting is that it’s a stealth urban built infrastructure story.

As it turns out 75% of ISFC loans (over 100 so far with 1000 goal in five cities) are for construction – generally a new school building or an extension. Just for giving schools the chance to offer more services in low income neighborhoods, ISFC is already facilitating one of Smart Cities Advisors’ main issue points – to not just increase the supply of housing but also social infrastructure like schools.  The fact that they’re aimed at low and low middle income segments clearly makes them socially inclusive.

ISFC’s competitive advantage, in addition to lending to an underserved audience, is in delivering by offering fast, personal customer service vs. banks, closing loans in about two weeks vs. four to six for a commercial bank. This forces banks to step up their game. In fact, ISFC hopes that they encourage commercial banks to open up their lending to schools in this socioeconomic segment. This lesson carries across sectors, we believe. Construction in India is notoriously inefficient and schedules unpredictable. Being able to deliver a better building faster and more sustainably in India would be a huge competitive improvement.

Consider the average $30,000 loan. 75% of those are for new construction and 25% are for computers. It’s a fully amortizing personal loan with a 3-5 year term with an interest rate of 18-20% and LTV of 80%. The loans also carry a personal guarantee, generally collateral on another piece of land, not the school. Borrowers are trained in how to use credit, understand their debt capacity and effectively make use of the loan. Loans can be disbursed in the name of vendors as construction progresses.

In addition to the company’s five basic credit filters, their ongoing experience with schools and school owners is giving them insights into what makes schools better and more creditworthy, such as schools run by women; schools that own their own building; schools that get paperwork in on time. The school building can’t be offered as collateral. They already have student teams at ISB developing business plans for lending in non-financial products, such as furniture, IT, books, etc. The business has been so successful that marketing is now word of mouth.

ISFC does confront the usual challenges of gaining the trust of their clients, default risk, reporting on the schools’ double bottom line, minimal documentation and informality, as well as difficulty finding good managerial staff. However, their business plan seems to be helping good schools get better.

Sustainability and the low cost school. Social inclusion through education and BOP finance in an urban setting are already important achievements. Adding environmental responsibility to this would make a triple bottom line with long-term consequences. After visiting some schools, we believe there could be a tremendous opportunity for both improving schools’ impact on students’ learning and health, while embedding environmental education at an early age. Given that it’s low income communities that generally most suffer the problems of water supply, poor sanitation, lack of sewage systems and waste treatment, nutrition and other issues, if these schools were low cost, private AND green, we believe it could make an important impact on children’s health (and teachers’), their learning experience and cost less to run as well.

Visiting the schools was indispensable for us to think about how low cost private urban schools could be a tool for improving livelihoods and promoting sustainability. David took us to St. Mary’s School and the Nehru School, both quite different schools but, in each case, tremendous potential for introducing more inclusive and sustainable elements if we could make the business case, which normally revolves around reduced operating costs and other well-being indicators like health, happiness and higher achievement, which can only be quantified over time and with appropriate benchmarks.

For instance, St. Mary’s School, in business for 20 years and currently over 800 students strong, is planning to build a new school on 106 sq. yards of land with a loan of about Rs. 20 lakhs (approx USD 50,000). Their current operating costs are low relative to other items like teacher salaries – only Rs. 1500-2500/month for electricity (USD 37) and Rs. 800 for water (USD 20). The school has a borewell which provides water. Average tuition is Rs. 250-500/month (USD 6.25 – 12.50). So lowering operating costs doesn’t necessarily offer major opportunities here. However, teacher retention can be an issue, so to the extent that healthier buildings encourage better learning and learning environments, it could help with keeping teachers as well.

From our perspective, we identified a number of issues that might be addressed easily in the new school. Children are learning in tight crowded spaces, and the only common recreational space is that provided temporarily by the neighborhood association. Only 2 bathrooms for girls and 1 for boys – for the whole school.  So extreme is the need for space that the roof was being used as a classroom for three classes even in the scorching sun of that day, with limited shading for all those sweet little heads trying to learn. The owner wasn’t clear on whether the roof in the new school would also be used for classroom space also. We thought a very modest green roof – perhaps covered with a canopy of plants or recycled material – would be a low cost means of providing much-needed social and play space – maybe a small food garden.

Interviewing the owner of the school about the idea of more sustainable design elements in the new school that would cost little or nothing to implement, she posted that there is the gap between theory and practical application of environmental concepts, expressing frustration that the government has responded slowly to these issues. She also noted very little public awareness as a result.

Although she recognized that some greenery (perhaps those identified by Kamal Meattle as oxygen providers) would add to the school, she was concerned that the number one priority for space is for accommodating more children. We felt that it might do to make the school more competitive in a difficult-to-replicate way if, as she said, she was hoping to attract children from the bigger schools.

The Nehru Public Children’s School, 18 years in operation and with about as many students, was located in slum area with a number of informal settlements nearby. Nehru is popular because of the high achievement of the students. The Nehru building, which was very well-maintained, underlined the importance of the school in the community – as a symbol of social mobility, as a vehicle for economic development and as a hub of the community.

This school was noticeably larger and more open with a loan of Rs. 10 lakhs (USD 25,000) with a total project cost of about Rs. 15-20 lakhs (USD 37,500-50,000) with a project size of about 900 sq ft. This is already useful data on what it costs to build a no-frills building at the economic margins of India’s cities. The owner plans to be able to accommodate about 240 new students with 10-12 rooms, each room able to house approximately 30 students. So depending on the actual number and how many students move from the old building to the new one, the ratio would be about 2.5-3.75 sq ft per student, not including common spaces like hallways or the bathrooms.

Again, operational costs were pretty low and no big problems with power or water supply. Each floor has a staff room and 4 bathrooms with the new building to have one more. Still without common or recreational space, children now use the vacant space around the school. The school may buy space for a playground, but the roof is currently unused. That might be a possibility for a green roof. The school wanted to separate the circulation for older and younger children to detangle the current a.m. and p.m. traffic.

Clear potential improvements. Because the new addition to the school was almost done, we could observe some of the challenges, shortcomings and opportunities. For starters, the staircase was situated on the outer wall and blocked daylight from entering classrooms where it would most benefit students. Also, classes had no windows in classrooms because they were situated on the adjacent property line. Some basic insulation between classrooms would help sound quality in classrooms. Low VOC paints should be used to minimize the impact on people’s health. Windows between the stairs and classroom might have been expensive, but some recycled material, like the bottles used in Yatin Pandya’s projects would be inexpensive, creative ways of letting light into the classroom from the stairwell. Finally, the classrooms in the basement showed signs of water seepage and mold, which raised our concern about health issues from indoor air quality.

Questions about a baseline. One benefit of integrating sustainability in these schools, even in a limited way, might be childrens’ and teachers’ health. According to the school owners, absentees due to illness among students are very common. Still, we would need a better baseline and we’d have to adjust for environmental factors outside the school because children are also being affected the dust, dirt and poor sanitation of low income neighborhoods.

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