Author: Rana Kapoor, MD & CEO, YES Bank & Chairman, YES Global Institute
Notwithstanding the intent of the government to increase allocation into social sectors, it might be constrained to open the purse strings due to fiscal concerns and lower than expected GST collections. However, the Budget document can open up avenues of investment through innovative changes that will attract quality private capital in these sectors which are quintessential for effecting rise in living standards and making growth more inclusive. These interesting tweaks to enable deployment of private capital into social sectors while safeguarding them from adverse market forces, will offer a larger social impact.
- Individual Health and Education Account: government should enable dedicated savings for health and education by announcing individual health and education account.
Health Savings Account can be used only for spending on medical care of the individual or their immediate family. This account shall have tax deduction in line with PPF contributions. Globally, these accounts are clubbed with a high deductible health insurance plan. Considering the Indian context of healthcare financing with very high out-of-pocket expenditure, the government can provide flexibility to financial institutions and banks to experiment with such instruments. This can channelize the sunk cost associated with medical insurance towards creating a pool of dedicated healthcare savings and also provide an avenue to finance elderly care. The inevitable moral hazard and adverse selection aspects of health insurance can also be averted.
The plan performance can be superlative in India which has a predominant young population and could serve as a healthcare security net for the population as the demographic ‘ageing’ starts over the next decades. Potential linkages with the existing social security schemes in life, accident cover and pensions could also be explored. A similar structure can be worked out for creating an Individual Education Account for dedicated savings for higher studies.
- Income contingent education loans: instead of the current mortgage based education loan product, government can initiate a new loan scheme based on income of the borrower. Income contingent education loans are a definite improvement over current mortgage based or unsecured education loans. It makes both social and commercial sense over existing education loan product as it reduces social and economic stress on the student and is essentially saved from the vagaries of the job market. If the student ultimately cannot payback, the loans are to be written off by the government. The extensive use of Aadhar greatly enables successful execution of this policy. Globally more than 20 countries are using this product and it has been found that the rate of payments is much better.
- ‘For-profit’ Education: Private sector institutions beyond some islands of excellence, which are allowed to operate on ‘not-for-profit’ basis, are generating huge surplus without adherence any quality parameter. Moreover, large segment of higher education (mostly professional) is considered economic investment instead of social service. Opening up select section of the sector would not only attract credible private entities into the sector but also expand the realms of education into niche areas like design, digital skills, liberal arts and other innovations which is quintessential for the future workforce of the country
- Refinance Agency for Skills: while the ‘skill loan’ product has been notified in 2015, there is reluctance on the part of lenders to extend skill loans because of small ticket size, high transaction costs incurred and logistics issues. The existing mechanism of credit guarantee funds has not been able to attract lenders to this stream. To step up finance to this segment, a refinance agency needs to be created. The refinance agency can buy the skill loan book of the lender and issue bonds or debentures against the skill pool. The government can provide a credit guarantee to the refinance agency in collaboration with multilateral agencies like the World Bank or ADB. Availability of finance can be a key enabler to take off the ‘Skill India’ Mission.
- Priority Sector Status to Medical Loans: With the current low penetration of health insurance, users have to resort to loans at exorbitant rates of interest and unfavourable terms. There is a strong need to curtail financial hardship created by medical emergencies. Therefore, patient loans should be classified as priority sector lending by RBI, as a medium term measure till insurance coverage catches up.
- To limit rising cost of healthcare, long term financing options needs to be created for healthcare and hospitals in particular as they have a high gestation period. Progression of healthcare from infrastructure sub-sector to complete ‘infrastructure status’ must be completed. This would open avenues of long term financing at lower rates and access to ECBs which is much required.
- Social Finance: on the lines of countries like UK, the Government can offer tax deduction to individuals for eligible social impact investment. This shall open a huge new opportunity for social enterprises to attract commercial capital to the impact space.
In conclusion, we need to re-imagine the ways of funding social sectors and security nets for the population. A new fully secured digital identity, progressive maturity of India’s financial markets and ample global liquidity gives us the headroom to explore out-of-the-box solutions for tackling challenges in social sectors and put them at par with the rapid transformation that is presented by advancing Tech economy.