High CAT score, class performance may get you cheaper study loan

Institutions will be rated based on job placements and the repayment track record of their students

Students getting admission in top educational institutions, such as the IIMs, may soon get education loans at lower rates. The interest rate may be cut further if they get a high score in selection tests, such as CAT.

The finance ministry is creating a framework for rating institutions, courses and students to enable banks to decide the interest rate on a loan, depending on the repaying ability of the student concerned.

Just like housing loans, a complete profile analysis of the loan applicant will be done by the bank before approving the loan. The student’s performance during the tenure of the course will also have a bearing on the rate. Besides, the guarantor’s track record may also be taken into account while giving a loan.

The ministry has already started talking to some rating agencies for assigning the ratings and is confident the proposed move would bring down interest rates for meritorious students. The Indian Banks’ Association (IBA) is developing the framework and may soon issue a circular on it.

Educational institutions will be rated based on job placements and the loan repayment track record of their students in the past. The rating will be assigned only for the purpose of interest rates on bank loans and would not be a reflection of an institution’s performance on other parameters.

“If the interest rates are linked to the rating, students will be keen to perform better. Educational institutions will encourage their students to repay the loans on time and that would help banks by reducing the risk on loans. If we are able to implement it successfully, education loans may become as cheap as home and auto loans,” said a finance ministry official.

The finance ministry is also planning to set up a Credit Guarantee Fund soon to allow banks to extend advances of about Rs 10,000 crore on education loans of up to Rs 7.5 lakh. The official said the fund would also provide details of the credit history of the borrower and the guarantor.

Currently, education loans are costlier than car or home loans because banks are hesitant to lend in the absence of a guarantor or collateral for loans of up to Rs 4 lakh. For loans up to Rs 7.5 lakh, banks insist on a guarantor though collateral is still not required. Many banks, especially in the private sector, don’t give education loans easily, fearing that bad loans cannot be recovered in the absence of a security.

Gross non-performing assets of banks for education loans had risen to six per cent last year. Education loans of over Rs 49,000 crore were outstanding at the end of March 2012, compared with Rs 43,000 crore at the end of the previous financial year.