Education Budget: Modi govt’s HEFA loans ate into central institutes’ infra funds, despite slow disbursement

NEW DELHI: When a team of researchers from the National Institute of Public Finance and Policy (NIPFP) asked 78 institutions about their experience with borrowing from the Higher Education Finance Agency (HEFA), just 23% could say the shift from block grants to project-based financing through loans had helped them.

A larger number, 36%, said the shift was not an improvement and 41% went with “can’t say”. It isn’t hard to see why. HEFA was meant to bring efficiency and speed to infrastructure development in higher education institutions. And while some institutions, typically the well-heeled older technical institutes have found the HEFA loan system speedier than grants, overall, the picture is more mixed. For many, the sanction process was long, tedious and expensive; most outrageously, some institutions found themselves having to repay even before the loan was disbursed.

By early 2023, when NIPFP concluded its review of HEFA, the finance agency, set up jointly by the ministry of education and Canara Bank, had sanctioned loans worth Rs 17,505.95 crore to technical institutions and central universities set up before 2014. But it had disbursed less than half of that amount. As per an Right to Information (RTI) response from HEFA, by March 2024, the total sanctioned amount for all categories was Rs 39,120.72 crore but the amount disbursed was again about half – Rs 19,968.26 crore.

The NIPFP report, also obtained through an RTI application, revealed the slow pace of project completion in technical institutions outside the oldest IITs. Of the 437 projects financed by HEFA, a little over 24% were yet to start by early 2023. About 63% – 275 projects – were between 50% and 100% complete. The majority of projects undertaken by the old IITs were complete – in fact, at institutions with high internal revenue, project completion outpaced HEFA financing – but even among them, IIT Kanpur, IIT Kharagpur and IIT Guwahati were “lagging”. Others had lower levels of progress. “Overall, it is a mixed performance, with variable rates of progress across Higher Education Institutions (HEIs),” the report concluded.

The COVID-19 pandemic slowed projects and loan disbursement and in the process added to the financial strain on institutions, as described in Part 2 of this series. The loan policy is such that in some cases, institutions had to start repayment before their loans were even disbursed. And as they dealt with loans, they found regular grants shrinking.

HEFA Loans: Delays in sanction

The HEFA was set up to replace government grants with loans for infrastructure expansion. It was to raise funds from private investors and donors – which, as the first part of this series shows, it failed to do – to extend as loans to institutions for specific projects.

“HEFA was born out of the vision of Prime Minister Shri Narendra Modi for providing additional finance for promoting research in the higher educational institutions,” said the government note on sanctioning of the first six loans to IITs Bombay, Delhi, Madras, Kharagpur, Kanpur and National Institute of Technology Surathkal.

One argument mounted in favour of the radical change HEFA brought was the speedy arrival of funds. Several higher education institutions reported delays of at least seven months in approval of loans by the ministry of education. An institution of eminence (IoE) – there are only eight public IoEs – said the ministry took more than a year to turn down their proposal. Some institutions even had to revise their projected costs and submit financials afresh because the time the education ministry and HEFA took to clear their loan, the costs had changed.

“The financials of one of the projects was submitted with the MoE in FY 2021-22 for which the approval has been given in FY 2022-23. Now HEFA wants us to provide financials again to get the approval of the same project from HEFA board,” an IIT told the NIPFP team. Institutions waited as long as two years. If cost escalation exceeded 10%, the same review process was repeated.

“It creates uncertainty for the institutions,” observed the NIPFP team in its report. It recommended “a single approving committee with representatives from MoE, ministry of finance and HEFA”.

In response to an RTI query filed by Careers360, the education ministry said that from 2017-18 to 2023-24, it sanctioned 174 loans of 197 applications (89.6%). The ministry received loan proposals amounting to Rs 45,225.87 crore and sanctioned Rs 39,719.75 crore till 2023-24.

A parliamentary panel in March 2023 asked the ministry to ensure “speedy disbursement” of HEFA loans.

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HEFA: Repayment before disbursement

With the most familiar types of loans, the entire principal is disbursed at once and the borrower repays it, with interest, in equal instalments. The HEFA’s loan repayment system is aligned with the sanctioning and not disbursement, which happens only when the borrowing institution starts a project and raises a demand.

In consequence, institutions found themselves having to repay even before any amount had been disbursed to them.

“We signed a loan for procurement of equipment in 2018. It took 10-12 months for disbursal of the loan. We have to procure and then only payment will start. As per the escrow agreement, they put a clause that the first payment should start from the date of signing of the agreement (and not disbursement). HEFA asked us to put Rs 8 crore in the Escrow account without loan disbursement. It is our hard-earned money and we want to use it. Unless HEFA releases the money, we do not want to release Rs 4 crore (half-yearly instalment),” said a NIT which has taken the loan.

All institutions required to repay 100% of the loan principal see the escrow mechanism as a hurdle. “The money is being blocked without reason. At times, the amount repaid has far exceeded the amount disbursed,” said the NIPFP report. The reviewers recommended synchronising the repayment and construction cycles.

According to the ministry, HEFA has collected Rs 14,637.81 crore (73.3% of loan disbursement amount) as repayment from institutions, from 2017-18 to 2023-24. The HEFA management said their system ensures “funds will not be kept idle with the institute”.

“The cost savings is much higher….Suppose only 20% is used, only so much is disbursed by HEFA. The institute also has to monitor the project and based on their recommendations we disburse the money,” they said.

Declining education budgets

The switch to HEFA caused an overall shrinkage in funds for infrastructure. “Notably, after the introduction of HEFA, overall external financing for infrastructure development of centrally funded HEIs dipped, since capital grants declined and HEFA loan offtake/disbursements remained low,” said the report.

The RISE initiative brought schools and medical colleges under its ambit apart from central universities, IITs and IIMs, and other central institutions. Through RISE, HEFA became the nodal body for infrastructure financing in education – new and existing projects that were under 70% complete were moved to loans from grants. Higher education institutions are estimated to need infrastructure development worth Rs 88,000 crore by 2027, says the report.

From 2012-13 to 2017-18, when HEFA was set up, centrally-funded institutions were getting capital grants to the tune of Rs 6,000-8,000 crore every year, says the report. After HEFA and RISE, “for three years 2018-19 to 2020-21, capital grants thus remained less than Rs 5,000 crore”.

As Part 2 of this series covered, the review had recommended leaving a large chunk of institutions – including all under 15 years old, basic science and research institutions and others – outside the scope of loan financing.

They do not generate enough internal revenue to repay their share of the principal or interest. Plus, they have found their grants cut because of changes wrought by HEFA.

As the education ministry pushed more and more institutions to go for HEFA loans, capital grants plateaued. Depending on the repayment window to which the borrowing institution belongs, the interest amount and part of the principal come from the government as part of recurring grants. But the institution must still pay its share for which it must generate more internal revenue (IRG). University Grants Commission, in turn, offsets the IRG before making the recurring grant to the institution.

As one central university put it: “The more revenue we generate, the less and less we receive as grants. The government is deducting the internal revenue and giving us the remaining amounts.” Over half the central universities saw negative year-on-year growth in recurring grants in 2018-19 and 2020-21, said the report.

“There’s no increase in grants. The university being a new university has limited internal resources, grants from UGC are also sanctioned by deducting the internal receipt. Hence, it becomes difficult to manage funds,” an university said.

Technical institutions are repaying parts of both the principal and the interest. “We request for additional grant for servicing of HEFA for loan principal and interest…Notably the MoE had granted an additional grant of Rs 7.5 crore for servicing of the loan principal amount in 2020-21. However, no additional grant has been sanctioned for the institution in the year 2021-22,” said a technical institution set up after 2014.

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Even those that have not borrowed from HEFA feel the squeeze. For the past three to four years, under the recurring head, we are getting Rs 41 crore. It is almost frozen. But then there is inflation…Every item in the recurring head will increase. After we exhaust recurring head amounts we depend on IRG,” said an Indian Institute of Science Education and Research (IISER) which has not borrowed. “When we increase the fee, it is only for the incoming batch…. Now every institution is adopting the same strategy. First year students will pay more.”

The education ministry has asked institutions to reduce recurring expenditure by 10% and keep recruitment of contractual staff to “bare minimum”.

“It is not that we have reduced the grants to the institutions under the recurring head,” it told the NIPFP team. “We have not reduced it but we have not increased it. And within that same money, if one has to repay the loan and also there is inflation plus other expenditure, then it is difficult for the institutions. Earlier this shortfall was met by IRG. Now instead, the recurring grant is to go towards HEFA. They have to reduce the recurring expenditure on contractual staff, etc.”

NIPFP has recommended creating a separate subhead for loan repayments that can “come as an additionality” rather than being subsumed within the recurring head. This has not yet been implemented.

Plus, with all grants for an institution going to a Treasury Single Account with the Reserve Bank of India, they don’t accrue interest, a further loss. Grants disbursed to a commercial bank account would fetch the institution some income.

The reviewers recommended a lower interest rate and in January, 2024, HEFA dropped it from 7.85% since 2000 to 5.5%.

HEFA: Projects and efficiency

Several higher education institutions informed that HEFA has steadied cash flow for projects. About 91% of the 78 borrowing institutions to participate in NIPFP’s survey said that project financing from HEFA was “timely”.

“Grants would be delayed and institutions would not receive funds consistently. One gets Rs 100 crore in one year and then something happens because of which the money is reduced in the following years… HEFA has cut down the delay due to non-availability of finances. It has made funds available at the right time and in appropriate measure. There are obviously other reasons for delay of work, but one major source of delay has been cut. A hostel building can be completed much faster now than in the pre-HEFA days,” an experienced engineer in a higher education institution told NIPFP.

That said, the shift away from block grants has been less well received. “The move from block grants to project-based financing was accompanied by a simultaneous shift towards loan financing. It is, therefore, difficult to pinpoint whether the dissatisfaction is with project-based funding or loan financing,” the reviewers noted in their report. “Some HEIs felt genuinely restricted by the lack of flexibility that project based financing brought with it.”

The HEFA board reviews progress of every sanctioned project in monthly meetings. As per the loan agreement, approved projects have a three-year completion deadline. Progress has been slow in third generation IIMs, some NITs and universities. As the NIPFP report noted, projects were completed fastest in institutions that were able to supplement the loan and tide over delays with internal revenue.

(This is the final part of a three-part series on exactly how HEFA, which provides loans to public institutions for infrastructure development, has impacted higher educational institutions and students.)