EXCLUSIVE: Many private schools in India are on the brink of bankruptcy and fear that a third wave of COVID-19 could be their end

• The stress among private schools is emerging mainly due to poor fee collections, which is not just affecting their cash flows but also impeding their ability to pay loan dues.
  
• Many of them fear that a third wave of COVID-19 infections, and a subsequent lockdown, if any, may even force them to shut down forever.
  
• The worst-hit have been pre-primary to middle-level schools, especially those catering to low-income families in rural and semi-urban areas.

Private schools in India have been struggling to pay their bills and loan dues to banks and other lenders due to poor student turnout amid the pandemic. Many of them fear that a third wave of COVID-19 infections, and a subsequent lockdown, if any, may even force them to shut down forever.


The worst-hit have been those that focus on pre-primary to middle-level education, and cater to low-income families in rural and semi-urban areas. Aside from causing a disastrous loss in the form of lack of access to education for children, this could lead to a lot of unpaid loans for banks and other lenders, and loss of livelihood for teachers and support staff.

Take Kerala High School, located in Karimnagar in Telangana, for instance. The budget private school that runs classes from Nursery to Xth standard has a strength of 550 students, with most hailing from the neighbouring villages. For the past 18 months, it has been surviving on near-zero cash flows as most of the fees it collected got exhausted in paying salaries to its staff, repaying loan installments, and running online classes.

The fee collection, at close to 20% for the last academic year, has been poor mainly because parents either lost their livelihoods during the pandemic or were unwilling to pay school fees due to absence of offline classes.

Further, even the attendance for online classes has remained low at just 20-30%, said Rajendra B, chairman and principal at Kerala High School for the past decade, as most students did not have smartphones and internet connections.

But if a third Covid wave happens and lockdown curbs are announced again, the 27-year old school may not even survive. “We had to take loans from family and friends to pay our loan installments during the pandemic as debt kept piling up,” said Rajendra. “If a third wave strikes and there is a lockdown again, I may have to sell half of my 1,000 sq. ft school land to repay the dues,” he said.

Further, many students studying in private schools have already switched to government schools over the past three years, as per the Annual Status of Education Report 2020 that surveyed 16,761 schools across India. The study, conducted by non-government body Pratham in Sep. 2020, said that the reasons for the switch “may include financial distress in households and/or permanent school shutdowns among the private schools.”

Pain Points

Private schools that operate in pre-primary, primary and middle education categories (classes Nursery to Class VIIth), according to Vivek Iyer, partner and national leader-financial services risk advisory at Grant Thornton Bharat, have been the worst-affected as they have remained shut the longest for close to 17-18 months.

The Covid impact, he said, has also been higher on schools catering to children from low-income families and rural areas “Lower the school fees and the category of the school, worse the Covid impact. That way, private schools catering to the most vulnerable segments have been the worst-hit, while their quality of education has also suffered due to poor transition to digital learning models,” he said.

Steve Hardgrave, co-founder and chief executive of Varthana, a Bengaluru-based non-bank lender that focuses on loans to affordable private schools that charge fees of up to Rs 3,000 a month, is dreading the expected third wave of the pandemic. “Of the 4,000 schools that we have funded, close to 5% (or 200 schools) have cited issues with continuing their business, but that number is expected to go up to 25% if the third wave strikes. Also, owners that were running schools on leased land and property are finding it difficult to sustain,” he said. “In some cases, schools had to be sold to a third-party to facilitate clearing off their loan dues.”

And Hardgrave is not alone. Even as schools have reopened in most parts of the country, classroom attendance remains thin at about 20-30% as parents are afraid to send their children to schools due to lack of vaccination for children below 18 years of age, said V L Ramakrishnan, managing director and chief executive at Shikha Finance, a Tamil Nadu-based lender that focuses primarily on school financing.

“Even though schools have reopened, it is an abstract factor, because parents are still reluctant in sending their children, especially those studying between Nursery and class VIIIth, back to schools,” he said. “About 3-5% of school entrepreneurs, or roughly 20 schools, in our portfolio, have expressed that they will not be able to continue their business. If a third wave strikes, that number would go up,” he said.

Mounting Debt

It is clear that the stress among private schools is emerging mainly due to poor fee collections, which is not just affecting their cash flows but also impeding their ability to pay loan dues.

Chirag Jagdish Chandra Pathak, who has been running Mother Care School that offers education for kindergarten to Class XIIth students in Kheda, Gujarat, had taken a ₹6 crore loan in March 2018 to construct a new school building. As the pandemic struck in March last year, the school’s cash flows fell to near-zero in the following five months.

Pathak, however, took quick action and gave teachers at his school smartphones and internet connection to impart online education. But a 25% fee cut by the state government and unwillingness of parents to pay school fees as they did not consider online education at par with classroom learning, led Pathak to avail a loan moratorium during the first wave. Later, he also applied for loan restructuring as his school’s cash flow remained deficient by 30-50%.

“Despite schools getting reopened again, our loan repayment ability has reduced by at least 30%. The biggest reason for that is uneven cash flow as fee collection has still not stabilized, while our leverage has gone up due to accumulation of interest,” he said.

Like Mother Care, many private schools in the country are dealing with mounting debt as most either opted for a loan moratorium or restructuring, in anticipation that their cash flows would improve eventually. But fee collections still remain inadequate, while interest on their loans have either gone up or their loan repayment period extended.

“Schools are over-leveraged by at least 2-3 times as their revenue took a beating of anywhere between 20% to even 80%, depending on the fee category of the school. Restructuring was granted to schools as their cash flows were expected to improve, but if a third wave strikes, it will be difficult for many to manage their debt as fee collection would drop again,” said Anuj Pandey, chief risk officer at non-banking financial company U GRO Capital.

So far, U Gro Capital that has ₹136 crore in assets under management across 75 schools as of June 30, has restructured close to 12% of its loan portfolio in school financing. Varthana Finance, which has ₹1,000 crore in AUM towards school loans, has also restructured about 15% of its portfolio. Shiksha Finance restructured close to 10% of its ₹185 crore loan book dedicated to 2,200 schools.

“Restructuring has not been much of a solace. Most schools continue demanding for extended repayment terms and moratorium, as their situation has barely improved,” said Ramakrishnan.

Agreed, Hardgrave. “Of the 70% schools that had applied, only 15% could be offered restructuring. Even among the most vulnerable schools, we could only restructure loans for those that showed clear signs of business continuity,’ he said.

The lack of restructuring options for schools, Hardgrave said, was mainly because there was no provision made by the government or the Reserve Bank of India for non-banking financial companies (NBFC) catering to schools. “There were no special liquidity provisions announced for NBFCs catering to schools and no benefits offered for higher restructuring of school loans, which also affected our ability to do so,” he said.

To be sure, the RBI had announced a one-time restructuring scheme last year to aid borrowers affected by the Covid-19 pandemic. The scheme was to be invoked by December 31, 2020 and implemented within 180 days for corporate borrowers. This year, the scheme was further extended for retail and small business borrowers to September 30.

“The government did not just reduce school fees but actively encouraged parents to not pay up, even when we were doing our best to provide online education. On top of that, there was no loan waiver and our debt kept piling up,” said Pathak.

A Systemic Issue

Not just schools, but specialized non-bank lenders catering to the school segment have also seen their asset quality deteriorate during the pandemic.

While Shiksha Finance saw its gross non-performing assets rise from 8.3% of its gross advances, as of June 30, to nearly 17% by August-end, Varthana’s gross NPA rose from a little over 6% by June-end to its highest-ever at almost 8%, as of Aug. 31.

But U GRO, which lends to small and medium sized schools, managed to keep its gross NPAs at less than 1%. This, Pandey said, may be because most schools that it lent to were located in urban centres and catered to the middle-class population strata.

And a third wave is likely to make matters worse. “While restructuring has helped with immediate cash flow issues, many schools may get pushed to the brink of shutting down if a third wave leads to a fresh set of lockdowns in the country. Even those with better cash flow management may face issues with running their enterprises,” said Pandey.

Iyer, however, sees the outcome a bit differently. More than permanent shutdowns, the pandemic would lead to further consolidation among private schools, he said. “Many large school chains backed by deep-pocketed investors are seeing distressed schools in rural and semi-urban areas as good acquisition opportunities for their own expansion.”

Be it closure or distressed sale, it is clear that the fate of already stressed private schools hangs in balance. A third wave may also mean the end of the road for many.

But Rajendra remains hopeful.

In September, Kerala High School reopened following the state government’s directions. The attendance, however, has been low at about 30%, as school buses— the only mode of transportation for over half of its students, are yet to ply.

“Once our buses get repaired, we may even touch 70% attendance in the coming weeks. And, if a third wave does not happen, we expect to return to normal fee collections over the next six months,” he said.