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Updated on: Wednesday, October 19, 2011

In ICRA’s observation, 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 (HEIs). The credit strengths include visibility and stability of operating cash flows, favourable working capital cycle backed by upfront payment of fees by students, exemptions from income tax, limitations on withdrawal of profits, and the robust demand-supply scenario prevailing in the domestic education sector. But on the ground, these advantages are often diluted significantly by several factors such as complex regulatory structure, shortage of faculty, irregular cash flows, regular capital expenditure requirements and credit culture issues.

Rohit Inamdar, senior vice-president, ICRA commented, “The extent of the drag caused by the negative factors is evident from the fact that less than one-fourth of the institutes in the universe of ICRA-rated HEIs carry investment-grade ratings. The credit quality of many of the HEIs has been negatively impacted by high gearing levels and weak financial discipline.”

ICRA believes that although opportunities abound for private players in the domestic higher education sector, there are several challenges confronting them. A major one among such challenges is the likely slowing of demand for certain professional courses (like management) against the backdrop of increasing economic uncertainties. Already, some moderation has happened in the demand for such courses over the last couple of years. As for the occupancy levels at HEIs, ICRA believes that going forward this statistic would be influenced most by the market acceptance of the institute concerned and the regional demand-supply situation.

ICRA notes that among the HEIs, the newly-established ones face the additional disadvantages of having a limited track record and a yet-to-be-built brand name. Further, HEIs with weak governance carry additional risks of possible diversion of funds to other entities, limited accounting transparency, and issues in regulatory compliance.

Anjan Ghosh, group head, corporate ratings, ICRA, said, “The limitations notwithstanding, HEIs with an established track record, diversified portfolio of colleges, structured cash flows, strong governance mechanism and balanced financial risk profile have been able to capitalise on the opportunities offered by the Indian education sector, and have obtained strong credit ratings.”

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