This post is the fourth of a multi-part series about the skill development sector in India and how to solve the challenges of increasing both formal and informal sector employment.
While skill development is a common term these days, we must appreciate that the skills required of each industry are nuanced, as is the training required—and the costs associated with specialized skill development vary. A single funding model would fail to pay for high-quality training across all sectors. Government funds cannot possibly scale to meet the extraordinary training demands through 2022. Innovative, sustainable financing options for skill training are imperative.
In my last post, I discussed India’s first skill voucher programme, the Vikalp Voucher model. The programme incentivises students to choose between multiple training providers and courses—paid for using a voucher—rather than receive free, low-quality training from a government-funded provider in a mandated vocational area. Yet, even with skill voucher programmes, specialised loans for vocational training will be an essential part of the equation to increase the number of skilled workers in India.
MILAAP is one model that could span skill development in multiple sectors and put us one step closer to achieving India’s goal of 500 million skilled workers by 2022.
The realities of lending
Among the millions of ambitious young people, there is a great demand for loans that can help solve the national skill development crisis. Conservative estimates put the investment needed at INR 4 trillion ($800 billion USD). But lenders have historically been apprehensive about extending even the smallest of loans—INR 10,000—to underprivileged students for vocational training for fear of high payment default rates. Young people ages 19 -25 seldom have access to credit, nor collateral to offer banks in exchange for training loans. Few private investors have contributed to the presently nascent market for skill lending funds.
Market-based lending systems could reduce the capital needed for vocational training loans—by as much as ten times—but existing banking products and processes are not designed for the skill development sector. Alternative credit systems with annual interest rates of 300 percent would exacerbate skilled students’ financial struggles. While the urban microfinance industry has seen positive growth, most MFIs have failed to bridge the gap between group lending systems and vocational training (individual lending) loans.
MILAAP: sustainable skill development funding
The Michael & Susan Dell Foundation has attempted to support innovation in vocational training loan institutions and supported six MFI pilots to uncover insights into the skill development market and implications for skill financing. Those findings have shaped the loan products and processes for training through MILAAP, a provider of skills training for underprivileged students, which have benefited 4,000 students to date.
MILAAP has evolved from partnering with investors to provide low-cost loans to, with the foundation’s support, assuming a more active role throughout the skill financing process. Meanwhile, MILAAP continues to fine-tune three key areas of their skill development lending that can guide similar financing programs:
- Loan Products and Lending Architecture – MILAAP secures funds via partnerships with training agencies, disperses the loans to students and manages processes. Meanwhile, training agencies source, train and place students; thus are well-positioned to facilitate loans and recovery of delayed payments. This model allows students outside of the microfinance ambit to secure loans at a reasonable 18 percent interest rate.
- Risk Management Strategies and Processes – Private investors have not been keen to fund vocational training loans for fear of risks involved. MILAAP mitigates those concerns through precise processes and clear criteria which can protect against defaults, lack of employment placement and future low salaries. Additionally, training institutes that guarantee job placements can share the risk.
- Relationship Management – MILAAP shares the Foundation’s belief in a collaborative approach to skill development. All the players – employers, training institutes and students – must work together. This model fosters collaboration while implementing systematic measurement processes to track a student’s potential pre-enrollment, training performance, post-placement and repayment
While there are still challenges in the process – like loan repayments – MILAAP is one model that could span skill development in multiple sectors and put us one step closer to achieving India’s goal of 500 million skilled workers by 2022. Look for future posts in which I’ll further explore other innovations and ways to solve the challenges of our skill development sector.
Other blogs in this series: