Loans from HEFA

There are media reports that the first set of loans have been approved by Higher Education Funding Agency (HEFA) for five old IITs and one NIT (Surathkal). It is an interesting model of funding, which no one seems to understand. On paper, it is very clear. You take a loan of some amount now and you pay back 10% of it every year from your internal accruals with zero interest (interest is paid by the government). So the total amount of loan you can take is 10 times your internal accruals.

From the language of it, it would appear that the expectation is that the loan will be invested in ways that will increase the internal accruals and thus the loan will be paid off from that additional income. Is that really the expectation. Shreya Roy Chowdhury finds out from a few IITs and writes her findings in this report in scroll.in. Nobody is really expecting to have larger internal accruals because of this investment. They may have a larger internal accruals because they may further increase fees, hostel charges and other user charges, which they could have done even without HEFA.

Does it make sense for an IIT to take loan. Well, if this was for a crucial infrastructure, which was already budgeted in the next 10 years, then essentially what you are doing is that spending that budget now, and not later, and what is great is that you don't pay any interest. So really fantastic for IITs. Whatever money was budgeted over the next several years will now not be spent, and in fact they will save money since a budget of 100 crores next year is based on a 5% inflation. You will only spend 95 crores this year. Hence you will only pay 95 crores next year and still save 5 crores in the next year's budget. So, fantastic scheme for IITs.

But does anyone plan for next 10 year. Do we really know what our priorities will be a few years from now. Is there a guarantee that Government will keep funding us at a certain rate. Would an interest free loan not encourage us to invest in lower priority infrastructure and then if our grants are not increased at the rate expected now, we will be in deep trouble.

But is there a real risk for IITs. Actually, no. In future, when IITs have to pay back, if Government gives us additional grants, well that is obviously great. If Government does not give us additional grant, we just increase user charges, and let Government deals with the hue and cry.

The only real risk is if the impact of all this is different on different IITs. If Government does not give us adequate budgets in future. If some IIT took smaller loan and don't have to raise user charges as drastically. Or if and some IIT is able to raise funds from additional sources like philanthropic funds, and do not have to raise user charges. In such a situation, an IIT which has no option but to raise user charges will be vilified. So the game is not exactly clear. And, therefore, for an IIT to take loans for high priority items is ok, but if they start taking loans of low priority items, they could be in some trouble.

So the basic question facing the IITs is: What if they take small loans, and government bails out IITs with big loans in future. You will appear stupid at that time. On the other hand, what if they take a lot of loan and government does not bail them out in future.