The Curious Case Of Byju's 'Internal Loan Module'

What happens when you want to enroll your child to an edtech platform, but you are running short on funds? You look for financing options from lenders. But what happens when you don't quite qualify for credit from them? Well, there is a solution for that too.India's largest edtech firm Byju's offers a financing option where the company provides products on deferred payments to parents. The mechanism is described as the “internal loan payment model” in an internal company document reviewed by BQ Prime. Byju's did not respond to a detailed questionnaire regarding the practice.'It's definitely a loan,' Parijat Garg, a digital lending consultant said referring to Byju's internal financing practice. Given that the service—typically educational content provided via a tablet—is provided on a deferred payment model instead of an upfront payment, the financing is essentially buy-now-pay-later, he added. 'The RBI is very clear now, that if it is this kind of a solution, then it is lending,' Garg said. Such internal loans are given to customers who are unable to avail loans through external financing partners due to low credit scores, insufficient income, or other reasons, a former sales executive at Byju’s told BQ Prime on the condition of anonymity. Avanse Financial Services, IIFL, Aditya Birla Finance, Kotak Mahindra Bank and ICICI Bank are among the edtech’s external loan partners. Queries mailed to these lenders on Monday remained unanswered.The Reserve Bank of India has existing guidelines for education loans but they pertain to higher education, not tuitions, Priyank Kanoongo, chairperson of National Commission for Protection of Child Rights said. 'There is no provision for education loans for tuitions... So all the entities—banks, finance companies, and edtechs—are doing the illegal work together,' he added. The NCPCR had written to the Serious Fraud Investigation Office about this in the past which then forwarded it to RBI, but the central bank took no action, Kanoongo said. .While Byju’s doesn’t substantially depend on internal financing currently, during the pandemic the internally financed sales accounted for about 35% of the total sales financed through loans, according to a person familiar with the matter.Currently the share stands at about 3%, this person added. These internal loans don’t carry any interest and can have a tenure of up to a year, according to four current and former Byju’s employees.The internal loan model has two programmes—Byju’s Direct and Byju’s Advantage, according to the internal document seen by BQ Prime. To avail Byju’s Direct, the customer is required to submit bank statements of the last three months, while there’s no such requirement for Byju’s Advantage.Both the models require minimal paperwork and have no minimum credit score requirement, according to four current and former Byju’s sales executives.The down payments on loans financed by Byju’s lending partners range from Rs 7,000 to Rs 15,000. However, upfront payouts shoot up and are in the range of Rs 10,000 to Rs 20,000 where Byju’s finances it internally, showed the internal document.Once granted, the financing option also ties a mandate onto a customer's account, which enables an automatic deduction of the recurring amount from the customer's bank account.'These would be customers unfamiliar with even net banking. They are alluring first generation learners,' Kanoongo said. This section of people is also one of the most vulnerable to financial malpractice, he added.In order to determine which customers can be granted internal loans, Byju’s uses processes similar to its external lender partners, according to the person mentioned above. The company uses indicators like the schools the children go to, the mobile phone set used by parents among other socio-economic factors to ascertain the affordability for the customer, the person added.Similar practices are also used by fintech companies when they tie up with lenders to extend credit to their customers..Byju's has expanded rapidly through acquisitions during the pandemic when schools went online. Last valued at $22 billion, the company’s stated its top priority has been to achieve profitability by March 2023, according to company’s previous statements.But at the same time the company revenue recognition practices underwent a major shift this year. Instead of booking multi-year revenues all at once, it will now recognise revenues only as and when they come in after its auditor Deloitte asked for the change following a long delay in the finalisation of its FY21 audit.More recently, some of Byju's creditors have asked the company to immediately repay part of a $1.2 billion loan creditors recently bought into, according to a Bloomberg report.A somewhat unusual business practice of allowing customers to avail internal loans raises the risk of defaults for the company, especially if the affordability checks go haywire. The firm recently announced that as part of an effort to prevent sales to families with a monthly income of below Rs 25,000, it would start doing affordability checks.But if the internal loan financing becomes more critical to the company’s sales, defaults may impact the loss-making company’s revenues. Moreover, availing loans which are not affordable can jeopardise the customer's financial stability.Taking out loans for tuition classes and failing to repay them can ding credit scores in a way that when the children actually need loans for higher education, they won't be able to access them, Kanoongo pointed out. The NCPCR will again write to the RBI and the SFIO on the matter, he said.

The Curious Case Of Byju's 'Internal Loan Module'

India's largest edtech firm Byju's offers a financing option where the company provides products on deferred payments to parents.

Choose a plan