Outlook Business digs into the details of a financing deal which has allowed successful schools in Indian slums to expand.

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For the last 18 years, S MadhusudHan has been running a private school in Hyderabad's Amberpet area. He's shepherded Pragati Vidyaniketan High School from 35 students to 2,000, without any assistance from banks. In late-2008, he did approach several of them for a loan to expand the school, but they played hard to get. "They had complex methodologies and took a long time to take decisions," says Madhusudhan, who is the Principal and Correspondent of Pragati Vidyaniketan. Eventually, all of them turned him down, citing insufficient documentation.

What they didn't say is that Pragati Vidyaniketan, like most Indian schools, is run by a not-for-profit society - a profile banks don't like lending to. Charitable trusts and not-for-profit societies are the preferred way to set up schools in India, as the inherent absence of the profit motive enables them to be recognised by the government.

But banks complain that by law and mindset, such trusts and societies enjoy a layer of social protection. So, if a school defaults, it's not easy to attach its assets the way it is with companies or individuals. While rigid processes like these build walls between schools and banks, social investor David Kyle likes to smash them, and come to the heart of the matter: does the school have the ability to repay or not? If it does, Indian School Finance Company (ISFC), which Kyle heads, will lend it money, whether it is set up through a trust or not. The school-financing company loaned Pragati Vidyaniketan Rs 18 lakh, which the latter used to construct a new four-storeyed building. "It took less than a month to complete the loan-application formalities," says Madhusudhan.

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