HDFC Credila: How India's Largest Private Student Lender Was Built

It was a beautiful day in the fall of 2005 when Ajay Bohora first heard about the potential of the education loan market at a structured finance conference in Boca Raton, Florida.

During a session titled The State Of The Alternative/Private Student Loan Market, a spokesperson for a rating agency proclaimed that the U.S. education financing space was worth $700 billion at the time.

"When the lady said $700 billion, I thought I had misheard her," Bohora told BQ Prime in a phone interview from his home in Nashik, Maharashtra. "After the session, I went up and asked her if she meant $70 billion."

Fresh from the sale of his BPO firm, Bohora was looking for his next assignment. This unexpected piece of information pushed him and his elder brother, Anil, to attempt building a private education financing company in India. If the U.S. had such a large market, India's vast student community could create an even bigger opportunity.

The months after the Boca Raton event were spent collecting primary information from various sources, including banks, on the state of student loans in India. Bohora found that the market was highly disaggregated and there was no clear system for giving out such loans. In fact, banks were seeing higher defaults in the education loans business, making it a low-priority business segment for them.

"We decided that there was room to create a monoline lending business focused purely on education loans in India," Bohora said.

The next step for the brothers was to find enough people who would believe in the business. One question they faced from everyone was: "What will you do differently?", Bohora said.

To address this, the brothers envisioned a technology-led platform that could deliver student loans with a clear focus on cost efficiency. With this, they incorporated Credila Financial Services in 2006.

Once the groundwork was done, the Bohoras had to find a strong backer who knew how to navigate the financial services business. By 2007, DSP Merrill Lynch bought a 41% equity stake in Credila, raising hopes for Bohora.

"Some time in 2008, we were all set to start our lending operations. But suddenly, we woke up one day and found that DSP Merrill Lynch was no longer our partner and that Bank of America had taken over," Bohora said.

In September 2008, Bank of America had taken over Merrill Lynch in the U.S. as part of a rescue deal during the global financial crisis.

The Bank of America team was very understanding, but they were clear that they did not want to be principal shareholders in any finance company in India, Bohora said. So, the hunt for another partner started soon.

"We had a few other finance companies keen on buying in, but we decided to go with HDFC as our original idea of a monoline financing business was inspired by them," Bohora said.

In 2009, Housing Development Finance Corp. bought out DSP Merrill Lynch's stake, valuing Credila at Rs 50 crore. This was the mortgage lender's first foray into education financing. Later, HDFC slowly bought higher and higher stakes in the company.

"Along with immense support from HDFC, we built a strong board consisting of top names from the financial services industry. HDFC helped us build a strong loan book with robust corporate governance," Bohora said.

In the years that followed HDFC's inclusion as a primary investor, the education finance company saw its loan book improve consistently. By March 2019, HDFC Credila Financial Services Ltd.'s loan book had expanded to Rs 5,334 crore from a little over Rs 1,000 crore in FY14.

Ten years after they first invested in HDFC Credila, the housing finance major bought over the entire 100% stake, officially making it a wholly owned subsidiary and valuing it at Rs 4,331 crore. The Bohora brothers, too, left their executive roles and moved on from the company.

Apart from a slight uptick in bad loans during the Covid-19 pandemic, HDFC Credila's book quality has largely remained stable over the years too. As of March 31, outstanding gross non-performing assets constituted 0.17% of Rs 15,298-crore worth of outstanding gross assets.

In its last rating action in April, rating agency ICRA Ltd. assigned a 'AAA' rating to HDFC Credila's bank borrowing lines worth Rs 8,000 crore and its non-convertible debentures worth Rs 1,100 crore.

In the years following his exit from the company, Bohora has worked as an adviser and investor to startups looking to grow in the education sector. However, he feels the state of edtech in India is not encouraging.

"Education is a high-touch sector. You can't apply a McDonald's-like model to it. There is a need to look beyond the hype," he said.

On Monday, HDFC told the exchanges that it had entered into a binding agreement with consortium of Baring Private Equity Asia and ChrysCapital to sell 90% stake in HDFC Credila for Rs 9,060.4 crore, which values the company at over Rs 10,000 crore. As part of the deal, the private equity investors will invest another Rs 2,003.61 crore for future growth.

As of April, outstanding education loans by banks were Rs 97,395 crore, up 18% year-on-year. In comparison, total retail loans rose 19.4% from a year ago to Rs 41.2 lakh crore.

"The valuation shows that the private equity investors are extremely bullish on India's education finance sector," Bohora said. "Considering India's student population, the sector has the ability to grow many multiples beyond the US market."