Software Nerd

Monday, July 30, 2007

Profitable Charity

Fund manager, Monish Prabai, runs a charity for highly intelligent, but poor, kids in India. He pays for coaching for the entrance-exam of the Indian Institute of Technology (IIT).

The IIT entrance-exam is extremely competitive (GRE on steroids) . About 250,000 kids apply for about 4,000 openings. Basically, if you're not in the 98 percentile of applicants, you won't get in. Also, it's safe to assume that applicants have above-median school-grades compared to those who don't apply.

An IIT kid can go on to a well-paying career. With this charity, a successful kid who could not afford $5,000 up front, will probably end up going abroad and earning $100,000 a year.

But, there's a twist to this giving ...

Prabai asks the kids to promise that, if they are admitted to an IIT, they will donate 10% of all their future income back to his charity! It's not an enforceable contract... more of a gentleman's agreement. Nevertheless, assume the kid is honest and sticks to the deal. I calculate that -- effectively -- the kid is getting a loan with a rate of interest over 20%. That's high if one has friends and family who can help instead. Otherwise, that's not too bad a rate for a personal loan to a poor family with no collateral, in India. Also, a few of these kids will probably end up as rich entrepreneurs, paying back a huge return on Prabai's initial outlay.

If one digs deep, the real problem is not the kid's poverty. The real problem is the poor enforcement of property rights. In India's legal system, a bank would find it difficult to have a similar loan repaid. Further, the law might consider such an interest rate "usurious". (Aside: Things are changing for the better though.)

Given that background, I think Prabai has chosen a smart approach to charity.

(Ref. : )



  • >will probably end up going abroad

    According to data on 80% of IIT graduates choose to stay in India. So the smart kid will probably stay in India.

    By Anonymous Anonymous, at 3:20 PM  

  • I'm not sure if the 80% of IIT kids staying in India *choose* to stay in India. There is a certain perception of IIT grads as being very narrowly trained and very specifically brilliant. They often do poorly in broad, analytical, critical thinking areas; and it is also known that many IITians are not fluent communicators or proficient writers.
    These may be reasons why many of them end up remaining in India.
    I came across a statistic recently that said that of all the young graduates entering the job market, only 20% are worthy of hiring. That's a remarkably low figure, especially given the fact that most young Indians spend practically *all* their life studying!

    By Anonymous Ergo, at 11:36 PM  

  • It would be interesting to know the profile of IIT grads who immigrate and compare that to those who do not. I have no idea if there'd be any pattern. My only guess is that those who are more interested in science and academics would typically try to move to the US. (Many IIT grads never pursue a science or engineering career.)

    By Blogger softwareNerd, at 7:26 PM  

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