Not all interest rates are created equal

In my previous post, I had mentioned how one should look at APR to compare different loan offers. 

However, what most of the blogs/videos do not cover is interest rates in different currencies.

Ever since I started working on GyanDhan, one of the top questions I get asked is 'How can you compete with XYZ player in the US/Europe when they offer a much cheaper loan?'. Depending on the situation, I then go on a discourse on how it is not correct to compare interest rates in 2 different currencies. Recently, I had a long conversation with a friend from B-school on the same topic, and that is when I realized that even folks with financial education completely miss the point on interest rates.

Before starting a theoretical discussion, let us look at some actual historical numbers. 

It is Apr'08. You have received an admit from the college of your dreams. You are now looking for financing options to realize your dreams. The amount required is $50k or c.21 lakhs rupees based on the prevailing exchange rate of 42.2, and you are looking for a 7 year loan with the standard 24-month moratorium period where you do not make any payments during your period of study. You have been approved by 2 institutions

1.) An Indian bank is willing to provide you a rupee loan at 12.5%,

2.) A US-based institution is willing to provide you a dollar loan at 7%.

There are a couple of assumptions in the following exercise. We have assumed that

1.) The interest rates stay at the same level for the lifetime of the loans. Pre-payments, and late repayments are not considered in the analysis below. 

2.) Both institutions have the same offer on all other parameters like processing fees, loan term, and other loan requirements.

3.) Exchange rates as of month-end are considered for all calculations. 

Considering that there are no other costs to consider you might be tempted to believe that the second offer is much better. What actually transpired is a much different story altogether. 

Had you taken the Indian loan, you would have been expected to pay nearly 47,000 on a monthly basis for the next 7 years. You would have paid nearly 40 lakh over the lifetime of the loan, this included an increase in the loan amount from the initial 21 lakh to 22.5 lakh. The red line in the figure above shows your expected payments from the Indian loan.

On the other hand, if you chose the US loan you would have expected to pay $827 starting May'10 which would be a mere 35,000 on a monthly basis based on the exchange rate at the time you took the loan. However, what happened during the period May'08 - Apr'16 was that the USD-INR exchange rate rose from 42 to 67.
As you can see in the chart above, almost 2 years into your repayment period the US loan actually ended up being costlier on a monthly basis than the Indian loan.

Over the lifetime of the loan, you would have ended up paying more if you took the USD loan. We have not considered that the Indian laws allow for a tax deduction if you have taken an education loan from an Indian bank but not if the loan was from an overseas entity. I had an MBA loan from overseas and this comes from personal experience. Looking at an NPV based approach might make the foreign loan look even more horrendous.

I will write another blog sometime later explaining the theoretical underpinnings of this, but it is safe to say that currency depreciation is linked closely to interest rate differentials and they are not independent of each other on a longer time horizon.


Which rate is better for you then?
Are you 100% sure you will end up working in the country where you are planning to study (say US)? If yes, a $ loan might not be a bad option as you would not be subject to any currency fluctuations. Be aware though that headline rates do not tell the entire picture, a 7% $ loan might turn out to be costlier than a 12.5% rupee loan. If you have a relative or someone who is willing to act as a co-signor in the US, and provided that person has a good credit history, you should try to get a $ based loan as the nominal interest rate might be really low.
If you think that there is a possibility that you might return to your parent country after completion of your studies, you don't want to run the risk that some of my seniors, who were taking up jobs in India, experienced back in 2014 when they realized that their Euro loans had increased by c.25% due to fluctuations in currency. 

At GyanDhan, we are working currently with Indian lending partners to provide education loans to help you realize your dream. Going forward, we have plans to help you access other financing options (US/Euro) if you so choose. Our recommendation even then would be to not blindly look at sticker rates but make a prudent choice when it comes to taking loans.

Student loans: Which loan offer is the best for you?

When you apply for a loan, what is the thing that you look for when you compare 2 offers from different banks? Ask this question at random and the answer will invariably be interest rates. However, this is where incomplete information or misleading messaging can lead one to make sub-optimal choices. 

Consider this case:

Bank A offers you a 1-year loan at 12% interest rate but Bank B offers you a 11% interest rate. Which offer do you take? 

Now consider that Bank A does not charge any processing fee, but Bank B charges a 2-3% processing fee. Does your answer change now?

Consider another scenario:

You notice on Bank A's website that a particular loan is available at 12.5% interest rate. Your friend refers you to another amazing institution that advertises a 9.33%* loan. Assume for now, that both companies do not charge a processing fees. Taking the second offer now looks like a slam dunk, doesn't it?

Chances are you did not notice the star (*) next to the 9.33 with the footnote and the actual calculations hidden somewhere else out of plain sight. 

If you are feeling flustered with all this, don't worry. There is a way for you to compare apples to oranges in this case. The right metric to ask your lender is APR or annual percentage rate of charge. This metric combines fees and other charges with interest rates to come up with a single number, allowing you to now compare apples to oranges (converted to apple equivalents :D ). I would recommend folks to go through the following 2 links if they are interested in getting to know more about APR. 

1.) https://en.wikipedia.org/wiki/Annual_percentage_rate

2.) https://www.nerdwallet.com/blog/small-business/apr-small-business-loans/

Watch the first 2 minutes of the following video to get a better sense of what an APR does.

There are other factors you need to consider when applying for a loan

1.) Speed of processing the loan application

2.) Convenience

3.) Add-on benefits, if any

Lenders in India do not advertise APR and chances are the loan sales officer at a bank/financial institution that you are talking to might not realize what an APR means. At GyanDhan, our aim is to inform our student borrowers of the best choice that they have given their profiles and match them with the best partner offer after considering all the above parameters. 

GyanDhan: Financing a better future

This will be the story of GyanDhan from my eyes. I will ask my partner, Jainesh,  to write his version of the story at a later stage.

Birth of an idea: It all started during the communication week at IESE. We were asked to prepare a speech as our deliverable. I was not going to speak about world hunger, my first skydiving class and the 1 minute of madness when I thought a million things because we could not synchronize our jumps perfectly, or 'my experiences living in a third world country'.

After spending the evening choosing a topic, I realised that what had bothered me during the past few months was the fact that some of my colleagues seemed to be having troubles getting the student loan. Banks were back tracking on promises and admitted students who should have been preparing for what lay ahead of them were tensed about arranging finances yet again.

The next day I spoke my heart out.  The media backlash post 2007 notwithstanding, I believe that markets can solve real world problems and I spoke for a couple of minutes about how I would solve the problem. End of the deliverable and the course.

Return of the idea: Third semester at IESE. I had secured an internship at one of the investment banks and was what others called relaxed. If there were any lingering doubts after my professional experience, the courses on leadership and team projects had already instilled in me the importance of a team.

The return of GyanDhan was in one of the economics classes when we were discussing government intervention and social reforms. I subscribe to the notion that governments should only provide protection for an individual's liberty, uphold the law (judiciary really) and ensure equality of opportunities when it comes to basic education. A child born in a poor family must not be deprived of basic education.  However, any higher education and skills training should be based on his/her aptitude and the markets willingness to price it accordingly. So I went on another rant in one of those classes.

Social cause or a business: I started 'networking' and learning more about solutions out there. Some of the entrepreneurs and experts I hit up were happy to share their experiences and pushed me to think harder about the idea. The only thing I knew at this stage was that I was not going to run a not for profit venture. I liked to classify this as a business which ended up serving some social cause. I later got to know the terms impact investing / social investments and the likes.

The three stories: These three stories are the ones closest to my heart when it comes to GyanDhan. Names changed to protect privacy.
1. Sahil, a young bright chap from Bihar, had to quit his IITJEE preparation midway in class XI because his family could not afford the tuition costs. There were no loans available and the only option was to fall prey to loan sharks.
2. Anamika, a friend of mine, had to bribe officials to the tune of 100k INR to get her loan sanctioned. The hidden costs of capital. She had a GPA of more than 9 in her undergrad.
3. Avantika, another friend, had secured admission to a B-school. The bank reneged on their promise of the loan midway through the course. The family had to sell off their ancestral property to meet this unexpected turn of events.

GyanDhan comes to life: I worked with a startup last year, shout-out to Grant from Quotanda. I decided not to pursue my own venture due to a potential conflict of interest until that partnership was over. In the interim, I presented a business proposal around rural tourism in India to a couple of investors as part of another course, hit me up if you want some slides on the same :-). I met a couple of great people at Quotanda but wonder if I should have started right after my internship.

January, 2015 is what I would have as the birth month of GyanDhan because that is when I had my first expense item for GyanDhan. I had planned a trip to India for my first face-to-face meeting with a legal expert. There was no turning back now even though there were doubts on job front I have mentioned in an earlier blog post.

GyanDhan - our mission: We want to enable education for the enterprising. 

Over the past month and a half we have been moving around the country meeting institutions, potential investors, our customers (both borrowers and lenders) and legal experts who will help us shape our dream into a reality. We still have miles to go but the feedback and more importantly our conviction makes us believe that we will find the solution to education financing. I will write a follow-up post listing more about our offering.

In the meantime, we would love to hear from you if you had troubles with an educational loan, or are interested in being a lender to help shape the careers of future leaders.

You know you are working on your startup when...

1. you derive satisfaction from your vision...while still trying to assess if you are crazy to have the vision in the first place
2. you look at people as potential customers no matter where you go, or try to understand their concerns so that you can make the difference (read: make money)
3. your faith in NPV gets even stronger, what with all the expenses you are projected to incur
4. you wake up with a defined plan of action only to have to work on something completely different 
5. you get super excited with the baby steps especially if it is with a potential partner or an investor
6. you refresh your coding skills for that 'MVP' because you found the quotes to be outrageous 
7. you can work from your bedroom 24*7, unless you have to meet customers / investors
8. you do not get excited about a weekend
9. you forget that Game of Thrones is still airing for a month
10. you write a blog post at 2 in the morning to energize yourself

More than anything you know you are working on your startup when you go to sleep with the hope that tomorrow will be better than today and the resolve that you will get it done no matter what it takes. 

Back home

I have moved back to India but am taking a fortnight off at home before I settle in Delhi. It means I have been having face-to-face conversations with family on a daily basis. Needless to say these are the most challenging conversations I have had so far.

The only number we discuss is what I was making pre-MBA followed by the fact that I spent a bazillion euros for an MBA and I am going to lay it all to waste by going for a venture. My parents have resigned to the fact that I am going to give it a shot and 'have faith in me', and my sister seems to be the only one who could rationalize my plans to any extent. The rest of the family is clueless at best. Convincing them will prepare me for some important meetings lined up for the month of May and June.

I love my conversations with the co-founder. At least I am not the only crazy here. :)

I cannot wait to move to Delhi.

ExSim: #1 reason for an IESE MBA

12 hours of sleep over 5 days. And you are still high on adrenaline, wanting to go on for another couple of days. This is the best possible way to end the MBA course and the biggest reason why I will advocate an IESE MBA going forward.

I am not talking of an all week long party in Barcelona but a course offered at IESE, ExSim or Executive Simulation. It is one of those simulation games with the twist that you have meetings with banks, union representatives and also you report to a board. 5 teams of 5-6 members who assume the roles of CEO, CFO, COO etc. spend the week running their companies.

By the end of the week, you see the best and worst in people. Subconsciously you make the choices of who are the people you would work for, who you would work with,  who you would hire and who you would have as a competitor. I learnt an awful lot during these five days. I was the CEO and it was all I could wish for before the startup and then some more. When I think of opportunity costs, this will pay me many times over.

How does this fit in my startup plan?

1. People matter: The biggest reinforcement was the fact that it is all about the people. Proper planning and ideas are important, but when in a pressure cooker situation I would much rather be surrounded by people with the right attitudes than the smart ones who are not motivated. One of my teammates will be my great friend going forward, and I even mentioned to him that we should work together in the future. Based on these 5 days, I will be comfortable with him running a part of my business.

I am also happy to have a co-founder who I had wanted on the team from day 1. We might have similar backgrounds but I am confident we can find our way through adversity.

2. Leadership style: One of my friends mentioned that she would die for her CEO, that their team was ready to work for him even though they had many issues. One's ability to create such a feeling in 5 days is commendable. I received favorable feedback from the board and the organizers but the team was not that synchronized.

I know that I need to buy PJ a cortado to learn the secret sauce.

3. Intelligence is underrated: intelligence/smarts is taken for granted at times. In my previous roles at Capital One and Credit Suisse I had heard comments from my mentors like 'any one can do this job'. Having interacted with people at those firms and at other places, I started wondering if those mentors were being delusional. I realized over time that they were pushing the right buttons. Some people might not take those comments favorably.

I need to hire the right people and acknowledge their strengths. Then it might be time to push those buttons.

Now on to why an IESE MBA.

1. ExSim: Enough said

2. Diversity: My primary reason for having  chosen IESE. The reality was much better than my expectations

3. Case study approach: The only mode of teaching that works for me. I have slept through lectures. Case studies require a lot of effort but it is rewarding.

4. Location: Barcelona, I rest my case

Importance of being patient

I mentioned one of P's, passion, in one of the previous articles. This post is about the other P, patience. These days I have started to value patience more than ever before. The reason: I realize that this is a long journey, and being impatient will do me no good.

Does this mean that one should not have milestones? How does BHAG (Big Hairy Audacious Goal) fit in this picture? And what about the regular inquiries into how far are you with your business plan / execution?

I believe milestones are very important. There has to be an element of intrinsic motivation to go down the start-up route. You work for yourself and the investors, so deadlines shouldn't be the catalyst for getting work done. Why have deadlines at all in that case? I think that it is important otherwise you might be walking down the wrong path for far too long. 

I am not a fan of management jargon and find it suffocating when people use it to cover absolute lack of content. Collins and Porras define a BHAG (pronounced BEE-hag) as "...an audacious 10-to-30-year goal to progress towards an envisioned future.". I like the idea that the authors did not call for a 1 year BHAG which is what annoys me when I see it used by some leaders. I like to think that you are either delusional or just haven't really set yourself a BHAG if you think it will be achieved in a year.

I have a BHAG, which I will announce through the blog in due course, and I think milestones will be the short term yardsticks that will help me course correct on the way. What is required is patience, prudence, and persistence. For me the biggest challenge is patience and that is something I am becoming better at as I walk this road. Inaction in the guise of patience is something one needs to be cautious about. 

I still have not finalized my team. This is the one place where I would prefer it take a long time rather than take hasty steps. I have heard a few stories over the last 2 years where the wrong team was the reason things fell apart for a start-up. I do not want my experience to be a lessons learnt exercise.The team that I currently envision (and hope it materializes) would be in it for the right reasons and it would be easier to navigate the challenges that we will face. Hope to get this completed by early next month when I start the next phase of my 'experiment'.

PS: Things are looking promising on multiple fronts. Looking at projected financial situation is not pleasing, but the contentedness is something I will have to start baking in for those projections to look better :).