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Born and raised in Southern Carolina, Steve Hardgrave might seem like an unlikely candidate to run a Non-Banking Financial Company (NBFC) in India.

However, he has dedicated the last 13 years of his life to empowering affordable schools through Bengaluru-based lender Varthana Finance.

Varthana provides loans to small private schools that lack existing banking relationships but need the money for activities like expanding classrooms, constructing or upgrading labs, or buying school buses.

Growing up, Hardgrave had always perceived private schools to be expensive and out of reach for most people. In the US, public schools are funded by local, state, and federal governments, making them generally more affordable and accessible to all students within a specific district.

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Varthana co-founders Brajesh Mishra and Steve Hardgrave

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In 2007, he was working at Atlanta-based impact investor Grey Ghost Ventures, which was exploring ways to invest in education as a tool to lift people out of poverty.

“As I was travelling around the world to monitor our microfinance investments for Grey Ghost, I started talking with the women who were the customers of the microfinance banks we had invested in,” he recalls.

“I would ask them, by the way, where do you send your kids to school? And half of them said, private school. I was blown away,” Hardgrave tells YourStory.

These conversations lit the spark for what would eventually become Indian School Finance Company (ISFC), and later Varthana.

With the backing of Grey Ghost, he started ISFC in 2008, aiming to provide small enterprise loans to affordable private schools.

However, due to disagreements with how Grey Ghost wanted to run ISFC, Hardgrave decided to leave the company and start his own venture. Along with Brajesh Mishra, a former colleague from ISFC, he set out to acquire his own NBFC licence in 2011. They finally obtained the licence in 2012, which enabled them to start Varthana Finance.

In March 2024, Varthana acquired ISFC’s school loan portfolio for Rs 126 crore.

Challenges of affordable education

As Hardgrave found out during his conversations, there are private schools in India that charge as little as $5 per month. 

Despite their lower fees, these private schools strive to maintain standards by adopting modern teaching methods, incorporating technology in classrooms, and focusing on extracurricular activities.

The owners of these schools had set up schools with their own resources and property but struggled to secure financing for expansion.

“Most banks avoid underwriting loans for such schools due to preconceived notions about their creditworthiness and the challenges involved in the underwriting process,” Hardgrave explains.

“In India, schools are often classified as trusts or societies by law, which means their governance structures are not as robust as those of companies,” he says.

“Consequently, many banks and financial institutions prefer to steer clear of this sector.”

To solidify investors’ trust in the payback guarantee, Varthana takes the key entrepreneur as a co-applicant on the loan, along with some trustees or society members to ensure governance and accountability.

For underwriting, however, Varthana cannot rely on bank statements and CIBIL track records alone as these are not audited financials; nor income tax returns, since these are not subject to tax.

“The crucial thing is knowing how to walk into the school office and ask for the right kinds of records, which are often kept in a spiral notebook or, you know,  ledgers and fee receipt books,” Hardgrave says.

The company will also visit the school in person to verify the number of students it has.

“This is where a lot of the secret sauce and kind of savvy comes in—you know how to correctly underwrite the schools. And that’s the kind of thing where, as you do more and more, you learn all these little tiny lessons, and you get better and better at it,” he adds.

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Varthana’s impact

Many of the schools that Varthana extends loans to provide education to children whose parents are farmers, daily wage labourers, auto-rickshaw drivers, and other workers from low-income backgrounds.

The company has a wide portfolio of 11,000 schools in 14 states, and supports them at various stages.

Typically, Varthana engages with schools that have been operating for about five years and have around 300-400 students. Often, these schools might initially take small unsecured loans for minor renovations.

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low-cost private schools or affordable private schools, account for 70%–85% of student enrolment in India’s most populated states according to a UNESCO report.

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The average loan size is Rs 35 lakh, but the range can be as low as Rs 5 lakh and as high as Rs 10 crore for much larger mature schools.

Among Varthana’s success stories is Sristi Global School, established as a preschool 13 years ago, which now offers classes from Nursery to 7th standard. The school follows the State Board syllabus and plans to adopt the CBSE syllabus soon.

Varthana has supported the school since 2014 and had initially offered an unsecured loan of Rs 5 lakh, followed by Rs 10 lakh in 2022, and Rs 1.73 crore in 2023 for infrastructure development. These funds have enabled the school to build additional classrooms and expand to three campuses in Bengaluru.

Over 11 years, Varthana has often provided multiple loans to the same schools, helping them expand from 300 students to as many as 2,000-3,000 students.

During the COVID-19 pandemic, Varthana distinguished itself from other lenders by offering substantial academic support. Their education department, staffed with specialists, provided learning packets for schools unable to transition to digital formats and offered digital content access to customers.

Looking ahead

Varthana’s focus on improving and expanding the quality of education in India has helped it gain attention from various impact investors across the globe.

In 2018, Varthana raised a $55 million Series C round led by private equity firm ChrysCapital. The round saw participation from Omidyar Network, where Hardgrave once worked, and Kaizenvest, which has invested in over a dozen edtech startups including Vedantu, BYJU’S, and upGrad.

In April this year, Varthana raised $10 million from impact investor BlueOrchard Finance. The company also secured $14 million from Blue Earth Capital earlier in January.

“We’re always raising debt with the growth of the portfolio. And our big strategic focus this year is to crack a little more of bank financing.” Hardgrave says.

“We have also started an equity fundraising process. And we would hope to raise another Rs 300 to Rs 350 crore of equity, if not by Q4, then hopefully in the first half of next year,” he adds.

In addition to supporting primary and secondary education, Varthana has recently ventured into the student loan sector. This new initiative focuses on helping students who have completed their 10th or 12th grades to pursue higher education or vocational training.

The company’s goal is to improve their earning potential and address the dropout rates after secondary education due to financial constraints or the need to enter the workforce.