Risk Based Rating before Sanction of Education Loan

Banks wary of using a risk-based system to give education loans ( Business Line )

MUMBAI, JAN. 10: 

The Finance Ministry’s move to get public sector banks to usher in a risk-based pricing regime for education loans could prove a non-starter, say bankers. The proposed system is based on assigning ratings to universities, institutes and colleges as well as students

In the six interactive meetings that banks and Finance Ministry officials had with education institutions across the country over the last year, the latter’s response to the rating concept was mixed.

FEAR OF ADVERSE RATINGS

While some reputed institutions welcomed such a rating model, many others (most South-based institutions opposed the idea) did not want college ratings to be taken up by banks or other external agencies. The fear among many privately run professional colleges is that an adverse rating may lead to students shunning them. Besides, the institutes have to pick up the tab for the rating, which the banks as well as the students can access free of cost.

“With only 10-15 per cent of the student population taking education loans, there is no visible incentive for educational institutions to pay for the rating of their courses by rating companies. Moreover, highly reputed institutions such as IITs, IIMs and NITs may not want to be rated by the credit rating agencies.

“Inferior colleges may also not want to pay for the ratings and have them published. All these factors would make risk-based pricing pegged solely on the rating a non-starter,” said a banker clued in to the developments.

Currently, banks are charging a fixed rate of interest for all education loans (there may be variations subject to the quantum) irrespective of the courses pursued, rating of institutions or student ratings. There has been a widespread demand for charging differential rates.

According to credit rating agency ICRA, the Indian higher education system is one of the largest in the world, featuring over 20,000 institutes and around 13 million annual enrolments.

HERCULEAN TASK

While credit rating agencies may be able to rate the institutes (based on placement record and average emoluments offered to graduating students), rating 13 million students could prove a Herculean task.

In the case of students, the ratings would have to take into account not just their previous academic record and ranking in the selection test but also their academic record during the study period (to revise the rating every year). In the midst of rising bad loans in the education loan segment, the Ministry feels banks should use the rating of educational institutions and student performance as an evaluation tool while giving out education loans.

Lending to promising students will reduce credit risk, improve asset quality and check the rise of bad loans.

Banks could use ratings as a differentiator to fix interest rates. The ratings would enable banks to increase interest rates for low-ranking students and those pursuing lower-rated courses.

Students getting admission to highly-rated institutions and those with higher ratings could be offered loans at lower rates of interest.

http://www.thehindubusinessline.com/industry-and-economy/banking/banks-wary-of-using-a-riskbased-system-to-give-education-loans/article4295163.ece