Banks want to grade colleges to pare bad education loans

Banks want to grade colleges to pare bad education loans

Mumbai/Delhi: Students who fail to secure admission in reputed institutes of higher learning due to poor results may soon find it tougher to secure bank loans.

Concerned over a sharp rise in defaults from educational loans in the past one year, Indian banks now want to grade educational institutions based on the efficiency and repayment track record of their students.

Banks have asked the Indian Banks’ Association (IBA), an industry lobby, to put in place a mechanism to rate the institutes.

“Banks want educational institutions to be graded. The idea is to put more checks and balances in place (to control bad loans)," said K. Unnikrishnan, deputy chief executive of IBA. “If IBA cannot do this on its own, there are other options available, such as doing this through state-level banking committees or appointing an outside agency."

Institutes whose students have a poor repayment record will get a low grade and their students will find it difficult to secure education loan. They may also need to produce collateral for such loans.

The move is triggered by an almost 45% rise in bad loans in fiscal 2011 to around 1,600 crore. Total educational loans outstanding rose to 43,000 crore given to 2.2 million students in March; around 4% of such loans are bad.

Currently, there is no rating of educational institutes by banks to assess default risk of a particular college or institute. Though rating agencies Crisil Ltd, Credit Analysis and Research Ltd (CARE) and Icra Ltd have begun rating various programmes offered by management institutes, they do not grade institutes, their placement records or the ratio of loan defaults by their students.

“It makes sense that banks can stipulate that students (availing loans) go to only good colleges, but the quality can only be decided by an outside agency," said T.N. Arun Kumar, general manager, head of criteria development, CARE.

Educational institutes, however, said such a move could hurt the sector and will have an adverse impact on millions of students from middle-class families aspiring for higher studies.

“A majority of the students are from middle-class and lower middle-class families, and if you put further checks on student loans, it’s going to hurt," said T. Duhan, director of JK Business School in Gurgaon.

Duhan, however, said the colleges, particularly those offering professional courses, must keep their promise of good job placement as it enhances the credibility of the institute.

“Unless your placement record is good, banks would hesitate to give education loans," he said.

The development has come shortly after banks started reworking education loan norms to control bad debts in the sector. IBA had constituted an expert committee under Indian Bank chairman and managing director T.M. Bhasin to modify the education loan scheme, first launched in 2001-02 by then finance minister Yashwant Sinha. The scheme was later modified in 2004-05, when P. Chidambaram was the finance minister.

The committee has proposed to make security mandatory for loans given to those students securing admission not on merit but through recommendations or hefty donations.

It also made a case for extending the repayment period of education loans from 5-7 years now to up to 10 years to facilitate repayment and reduce the probability of default.

IBA established the committee after complaints from some banks that they are often compelled to lend to students under pressure from politicians and influential people in rural and semi-urban areas even when they are not fully convinced about the credentials of the students.

Current rules say banks cannot seek any security for loans up to 4 lakh. Between 4 lakh and 7.5 lakh, they can ask for only personal guarantees, and collateral for loans above that.

Typically, banks lend to students at a rate of 10-11% for a maturity of 5-7 years and the students have the flexibility to begin the repayment only after securing a job.

Education loans have grown by a healthy 20% in the last few years with State Bank of India having the largest share of the pie. At end-March, its share of education loans was at least 11,000 crore—about 25% of the outstanding portfolio of the industry.

Senior bankers said an increasing trend of rising defaults from such loans needs to be checked urgently.

“We lend; don’t give scholarships," the chairman of a large south India-based bank said, requesting anonymity. “We lend when we feel that recovery will happen."

He also cited the inability of students to secure jobs after the completion of their course due to poor infrastructure and quality of education.

The move is a right step as many colleges in India are not outcome driven, said Bharat Gulia, senior manager, education practice at audit and consulting firm Ernst and Young India.

“Your fee structure must (be) commensurate with your placement record," Gulia said. “When you are not imparting good education and thus hampering the career prospect of a student, why should (the) bank take the responsibility of giving study loans?"

Some 15 million students are studying in higher educational institutes and constitute less than 14% of those eligible to pursue college education, official data show. The Union government has a plan to add 30 million more students to the higher education space in next 10 years.