I am exceptionally interested in the financing of ISFC. The company is financed primarily through a $5 million investment from Gray Ghost Ventures, but as ISFC grows the company is borrowing funds from Indian banks. Since ISFC is a young and innovative company targeting a market segment that the banks consider too risky to lend to, it should come as no surprise that these same institutions view ISFC as a risky endeavor in itself. As a result these banks charge ISFC rather high interest rates. Subsequently ISFC is forced to pass on these high costs to their customers in order to stay financially viable. Currently this translates into ISFC charging 26% per annum for loans with no collateral and 21% per annum for those loans backed by collateral. For a large share of affordable private schools, ISFC’s target clientele, this is prohibitively expensive. This limits the number of customers ISFC can attract, slowing company growth and restricting profits. Furthermore, and most importantly, this inhibits ISFC’s ability to have widespread social impact. Schools that are unable to afford such high rates derive no benefit from ISFC’s innovative loan products. Thus in order to enhance the company’s social impact it is imperative that ISFC raise capital at a lower cost.
The Beauty of Impact Investors
An appealing method to raise affordable capital is to attract impact investors. Such investors are concerned about more than profits, they are also concerned with the social impact of the institution they are investing in. In most cases self-described impact investors are willing to receive much lower returns on their investments if they can be shown to have a positive social impact. For instance, the impact investment fund Root Capital has managed to attract hundreds of millions of dollars to their cause while only offering investors a choice of returns between 0% and 2.5%. If ISFC leverages its social mission to attract such investors it would mean massive savings for the affordable private schools they serve.
Since first writing this piece I have learned that India maintains rather strict rules governing foreign investment in non-banking finance companies (NBFCs) such as the Indian School Finance Company. It is my understanding that NBFCs may only have up to 75% of their equity owned by foreign citizens and corporations. Since ISFC already has over 74% foreign ownership there is no room for equity investments from large American and European impact investing firms. If I remember correctly there is also a rule against NBFCs taking any foreign debt. This would mean that if ISFC hopes to attract any impact investment dollars they must attract them from the fairly nascent impact investing industry in India. A course I hope the company chooses to follow.