Giving Compass' Take:

• India Development Review discusses the state of education investment in the country and how those who put money in private schools could see a strong ROI, if they're willing to take a risk.

• What can organizations and funders in the U.S. learn from this example? Though the infrastructures may be different, the basics of cultivating good schools through impact investing remain universal.

• Here's more about the rise of budget private schools in India.

The landscape of lending for any sector is made up of formal and informal finance, mostly available through structured, market-driven rates via banks and bank-like entities.

In India, banks are yet to reach the remaining unbanked 19 percent of the population, and non-banking finance companies (NBFCs) are rising in their role as filling the last mile financial inclusion gap. However, from a borrowing perspective, a bulk of borrowing relies on informal borrowing as it is not possible to measure the creditworthiness of most banked customers. Therefore, the unstructured, word-of-mouth micro-loan variety is a common source of borrowing — where the collection mechanism is a function of the level of trust between the two parties.

The education space is no different. Here, the key to growth is to finance infrastructure — be it hard infrastructure like schools, classrooms, playgrounds, etc.; or soft infrastructure like training teachers, improving curriculum, and so on. The soft part is as important, if not more, because though it’s not recoverable against any physical collateral, it shows up in the learning outcomes and therefore ultimately in the growth of the school through stronger word-of-mouth in the community.

The finance to build this infrastructure could be provided by an informal moneylender, an NBFC that lends to SMEs, or a bank — each of these entities can play a significant role in enabling capacity growth of educational institutions.

The big advantage of investing in education is that you can predict the cash-flows of the business reasonably well if the school is doing a good job. A strong institution will have a good reputation (determined by word-of-mouth), and will continue to acquire new students (which is the primary basis for cash flows).

Read the full article about the opportunity in affordable private schools by Sandeep Aneja at India Development Review.