The idea came from a personal experience which is shared by many of us in the program. I was applying for an education loan towards the end of 2010. After being rejected (by the passiveness for action) by around 10 banks in my locality, I felt(influenced by a quote in ``Three Idiots``) that ``Ìn this country when you try to buy apartments, cars or luxury goods, banks run after you to give loan. Alas, when you need money for the purpose of education, you have to run after the banks!``. Thanks to a very supportive Bank Manager, my loan was approved but it took about two months. Since then I thought of finding a solution to this painful problem.
According to the data compiled by the Indian Banks' Association (IBA), as many as 325,000 education loan applications were received in 2009-10. This is projected to grow fast. Nationalized banks hold monopoly in education loan market in India because they offer attractive interest rates and flexible repayment clauses. However, the banks typically take around two months to process a loan. Despite the long processing time, in absence of better alternatives, customers still tend to queue in front of the nationalized banks.
Right now, the nationalized banks don’t charge any fee for processing education loans. Interest income is the only source of revenue for the banks. Our survey conducted among a set of 50 Indian students across the globe indicates that 45% of the sample is ready to pay upto $100(Rupees 5000) as fee if the loan is processed within 1 week. 9% is ready to pay upto $400(Rupees 20000). This survey result resonates with my personal experience and reaction to the delay. Our survey size is small and hence is supposed to suffer from noise and bias. However, the trend is indeed noticable and presents a case for building a model.
Given the huge (and growing) market size, this level of willingness to pay indicates a significant surplus. Indian banks should leverage on this.
We propose that the banks create a provision for priority education loan processing (1 week) for a fee. The banks should outsource the paper work and searching work for the priority processing workflow through a single vendor and keep judgement work in-house. This is the way visa processing work is done by embassies. They outsource the non-judgmental work to VFS. It is an efficient system. Canadian embassy in India processes student visa in 5-7 days.By outsourcing, bank will eliminate any marginal effort (and cost) at its own end. The banks should pay a small portion of the fee for each application to the outsourcing vendors. Because of fierce competition, banks can easily find the vendors and can negotiate a favorable contract.
The additional fee would act as an instrument of second degree price discrimination and create a fence between customers who want fast processing and who are better off with existing loan processing speed. By keeping the fee on the higher side, the banks would be able to better manage the demand. Revenue Management can be implemented in a crude form. Banks can decide to set a fixed fee(or fence) of, say, $400(Rs. 20,000). If we assume for the time being that the trend revealed by our survey is correct, 9% of the market will avail the proposed scheme and this will mean a revenue opportunity of Rs. 61 Crores ($12,197,000) for the banks. In the following table I describe the expected revenue opportunities at various processing prices:
However, in the above crude form, the banks would not be able to capture the entire surplus. If they opt for a Rupees 20,000 fee, they will lose the customers who could pay between Rupees 15,000 to Rupees 5,000. To capture most of the surplus, banks can implement a customized pricing scheme. We implemented a Multinomial Logit Model using some sample data and derived a simulator which recommends a price based on three attributes of the customers: asset, prestige of the institute and urgency. The model looks at the trend in the sample data and suggests a price for each customer that maximizes the expected revenue for the transaction.
There could be several obstacles in the implementation:
- Resistance from the unions: God bless the idea..
- Reluctance from the government. Can the government be courageous to implement the customized pricing? Government may fear public resentment. To address this, we can tweak the idea and derive a socialist model. It would look like this:
Process for all education loan applications will be outsourced and be completed in 1 week.
- Through customized pricing, banks will charge higher processing fee to people with large asset. The money raised from the affluent customers would be used to pay the vendors for processing the applications of the remaining mass. (This is nothing new. Business class travellers in airlines have been financing a portion of the the travel of economy customers since American Airlines implemented revenue management. I believe that the banks have the bargaining power to fix this term.)
- Remaining money could go to the bank’s pocket.
- Or, at least, banks could implement the crude model(fixed fee).
- To conclude, our idea can help thousands of students to get loans at a faster pace, help banks make money with minimal marginal effort and generate business (and employment) for vendors.
