Education loans: Banks to rate institutes

To tide over their bad loans and structure their loan products in a better way, banks will now rate B-schools and other educational institutions.

In a recent meeting between banks and over 150 education institutes, it was decided that Indian Banks Association will come up with a rating model for institutes.

This would be done under the aegis of Pritam Singh, director, International Management Institute, New Delhi.

"Now, bankers are going to be liberal in providing education loan. When you provide loan, recovery is equally important. We will use criteria like placements, academic standards, intellectual capital and connection with the industry, etc to rate the institutions," said Pritam Singh.

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The process may take about six months. After the meeting with education institutes, IBA, in a note, said: "Ideally, a system of rating of educational institutions based on placement records of students should help banks to structure their loan products better.

"A good placement history with higher salary offer for poor students would make the loan less riskier and would enable banks to offer better security terms and lower interest rates."

Banks say they can refine the assessment process by combining college rating with the rank obtained by the student in the qualifying exam. Banks can also rate students year to year and fix interest rates linked to the rating.

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"Lenders are insisting on ratings to ensure that they (institutes) are not fly by night operators, and have adequate infrastructure and the quality of education is such that it makes student employable," said IBA senior advisor Sangeet Shukla.

Banks also want to track students who take loans after they pass out. Authorities in colleges, said IBA, are willing to associate with banks to take full advantage of the offer.

There is also a need for a legislation making it mandatory for employers to deduct loan installments and remit to banks periodically. Banks are worried about the rise in loan default rate. The educational loans began to grow substantially from 2004-05.

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Many of them will come up for maturity in the next two financial years. There could be an increase in delinquency as many students either remain unemployed or earnings are inadequate to repay loans.

After realising the adverse impact loan defaults will have on the already stressed banks' balance sheets, the government has announced the formation of education loan credit guarantee fund. The details are being worked out, said another IBA official.

Educational loans have grown by 13.4 per cent in 12 months to Rs 49,500 crore (Rs 495 billion) in January 2012. The pace has moderated from 20.9 per cent in previous 12 months.

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At present, an education loan of up to Rs 10,00,000 is considered for studies in India and Rs 20,00,000 for abroad. A recent report by M V Nair Committee for Priority Sector Lending has revised the ceiling for priority sector status to Rs 15,00,000 and Rs 25,00,000 respectively.

The IBA and education institutions also discussed the issue of whether to charge differential rates on education loan. There could also be flexibility in terms of repayment.

"Considering that sometimes the student borrower does not get a placement with salaries comparable with others in the batch and he may find difficult to service the loan during the early part of his career, it was suggested that flexibility may be brought into the scheme by fixing progressively stepped up installments," said a member who was part of the meeting with IBA.