'Credit quality under pressure at private education institutes'

Credit quality at higher education institutes in India is under pressure, according to a sector note by Icra. “The higher education sector in India has several credit strengths inherent in it, which are, however, diluted to varying extents at the level of individual higher education institutes,” said the note.

Established higher educational institutes benefit from high cash flow visibility, given once a student is enrolled, the fee income is largely ensured for the course, the student attrition rates being low. “The working capital cycle for most higher education institutes also tends to be favourable, as according to the guidelines of the ministry of human resources, students have to pay the fee in advance for a semester,” it said.

 

It said the shortage of qualified faculty and the lack of a competitive salary structure posed a significant challenge to the growth of higher education institutes in the long run. Large initial capital expenditure and regular subsequent expenditures often weakened the financial risk profiles of these institutes.” For most disciplines in higher education, establishing an institute requires a large investment. To set up an engineering college with a yearly intake of 400 students, an investment of about Rs 20-25 crore is required. For a medical college with a yearly intake of 100 students, the capital expenditure can be upwards of Rs 45 crore,” the note said. It added large educational groups tend to have better credit risk profiles.

Rohit Inamdar, senior vice-president, Icra, said “The extent of the drag caused by negative factors is evident from the fact that less than one-fourth of Icra-rated higher education institutes carry investment-grade ratings. The credit quality of many higher educational institutes has been negatively hit by high gearing levels and weak financial discipline.”