Friday, January 11, 2013

Banks wary of using a risk-based system to give education loans

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.

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.

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