How to Determine Which College Loans Are Best: A Quick Guide

Providing quality education in Indian educational institutions comes with the challenge of developing quality infrastructure. Whether it is expanding or modernizing the college campus with the latest facilities, both options prove to be very expensive. This financial burden can be especially challenging for educational institutions that cater to students from financially backward families, who often rely on affordable, quality education to create better opportunities for their children.

To meet this requirement, banks, other financial institutions and non-banking financial companies offer certain packages. These financial solutions are designed to help institutions improve the experience they provide to their students and meet the growing demand for quality education. In this blog, we discuss the necessary factors that college leaders should consider before finalizing the best college loans for infrastructure development.

Understanding Types of College Loans for Infrastructure Development

There are a variety of college loans offered by banks and NBFCs in India, catering specifically for infrastructure development. The most available options are:

• College Loans for Educational Institution: This type of loans are especially designed to serve educational infrastructure projects. Such loans can be used in construction or upgradation of building constructions, as well as to invest in new technology.
• Term College Loans for Infrastructure: Long-term loans are typically used for large expenses such as building expansion or new construction. All the public as well as private banks and NBFCs offer these loans with flexible terms.
• College Loans for Construction or Renovation: These are specifically designed to fund infrastructure type projects, these loans cover various expenses like new construction, renovation and remodeling of facilities.
• College Loans for Green Projects: These loans fund institutions to invest in energy-efficient solutions, such as installing solar panels or green building projects that boost environment-friendly schemes. Most NBFCs offer such loans to encourage those institutions that focus on sustainable development.

Banks vs. NBFCs: A Comparison for College Loans

Before deciding whether to take a loan from a bank or an NBFC, it’s important to understand that each type of lender comes with its own set of advantages. Here’s a comparison to help you make an informed choice:

• Public Sector Banks: State Bank of India (SBI) and Bank of Baroda are some of the most popular ones, attracting more through competitive interest rates than their counterparts in the private sector. Typically, public sector banks operate through government-backed schemes that help save costs but are relatively more challenging to meet in terms of eligibility criteria.
• Private Sector Banks: Private banks take much less time than public banks and have more flexibility to customize the loan structure. Interest rates are slightly higher than public sector banks, but the turnaround time is much less with private banks.
• NBFCs: NBFCs like Varthana are very practical for affordable institutions seeking quick funds. They demand less collateral and disburse faster than banks, making them highly practical for institutions in need of immediate financial support. Additionally, most NBFCs are lenient with their eligibility criteria for affordable institutions, which can be particularly helpful for those that do not meet traditional banking requirements.

NBFCs: Key Advantages

1. Faster Processing: NBFCs are known for their quick loan approval and disbursement process, making them ideal for urgent infrastructure needs.
2. Flexible Terms: They offer more flexibility in terms of repayment schedules and eligibility criteria, making them suitable for institutions that don’t necessarily meet strict banking requirements.
3. Customized Solutions: NBFCs often provide tailored loan packages to suit your specific needs, such as equipment financing or digital infrastructure development.
4. Minimal Documentation: The paperwork for borrowing from an NBFC is generally easier and less time-consuming than with a bank.

Interest Rate and Loan Terms Comparison

Interest rates and tenors are also fundamental for economic efficiency and manageability. Here’s what college leaders should consider:

• Interest rates: Interest rates typically range from 8% to 12%, but may be slightly lower at public sector banks. NBFCs offer competitive interest rates, typically ranging from 9% to 15%, depending on your creditworthiness, along with flexible loan terms. While government banks offer fixed interest rates, floating rates are offered mostly by NBFCs. It may begin with low rates but it can increase depending on the market conditions.
• Fixed vs. Floating Rates: Fixed interest rates stay fixed throughout the loan period. Floating rates can fluctuate with the market situation. Institutions that want stability for a long time prefer fixed interest rates. However, floating rates may be preferred in a falling interest rate scenario.
• Loan Tenure: Both banks and NBFCs provide loan tenures up to 15 years by which the institution can spread out its repayment period. This will help manage cash flows to fund major infrastructure projects.

Collateral and Security

Most banks and NBFCs have strict requirements regarding collateral support for large college loans. The largest amounts are highly secured by including the following items as collateral, among others:

• Institutional Property: The usual collateral typically held by college owners includes land, buildings, and other assets for long periods. In the public and private banks, the preference is always high-value collaterals; NBFCs may consider various other forms of security.
• Government Guarantees: Some government schemes guarantee college loans, which helps reduce the collateral requirements for borrowing institutions from public sector banks.
• Third-party Guarantees: In some cases, banks and NBFCs consider third-party guarantees, such as trustees or affiliated educational institutions, as collateral replacements.

Government Schemes and Subsidies for College Infrastructure

The Indian government has implemented various schemes that help to reduce the cost of college loans for institutions:

• Credit Guarantee Fund for Educational Loans: This fund primarily caters to students while also mitigating risks for lenders offering institutional loans. For educational loans, banks can request guarantees under this fund, allowing for a lower threshold of collateral requirements.
• State Governments’ Infrastructure Development Schemes: State governments generally maintain some forms of grant or subsidized loan schemes in particular areas of college infrastructure projects in institutions located in less privileged or rural districts.
• Green Building Incentives: Educational organizations that seek to adopt green buildings can enjoy subsidies and incentives from the government. Some NBFCs have loans specifically designed for green buildings, which might be aligned with the government initiatives.

Repayment Flexibility and Moratorium Periods

Repayment terms vary from lender to lender, but banks and NBFCs will usually offer options aligned with scheme requirements. Consider the following:

• Moratorium Period: Public sector banks may offer moratorium periods where they delay the repayment period till the infrastructural project is completed. For instance, SBI offers flexible repayment schedules to align with the project timeline. NBFCs offer very long repayment moratorium periods and are relatively flexible in terms of repayment options available. Note here that most NBFCs in India do not typically offer a moratorium period.
• Flexible Repayment Options: NBFCs usually have repayment plans such as quarterly or seasonal payments that may be better suited for institutions with variable cash flows. Traditional banks also allow for quarterly or annual repayments, but they may not be able to easily accommodate seasonal repayment plans.

Documentation and Processing Time

The documentation process and approval time for a college loan can vary widely across banks and NBFCs.

• Banks: Public sector banks are a bit more demanding when it comes to documentation. They will require audited financial statements, detailed project reports, collateral verification documents, among others. The approval period is longer but the interest rates are lower.
• NBFCs: NBFCs require less documentation and are quicker to process. The lesser the paper work, the quicker the disbursal. This is exactly what the unaided institutions want when they need the funds.

Key documents required:

• Financial Statement: The certified/audited financial statement, projected cash flow.
• Feasibility report of the project with a timeline of the project implementation, goals, and potential influence on quality.
• Legal document for property, either as title deed or a lease, over all the collaterals
• Trust or society papers registration which guarantees the legitimacy of private schools.

Final Tips on Choosing the Best College Loan for Your Institution

• Align Loan Terms with Project Timelines: Choose a loan that aligns with your project’s cost and time horizon. When selecting a financial institution, look at its revenue cycle and the ROI it expects from the new infrastructure it plans to build.
• Explore Subsidy Options: There is a possibility of getting grants and subsidies either from the state or central governments, which will cut down your overall cost of borrowing.
• Bank Vs. NBFC Flexibility Terms: While banks offer lower interest rates, they are also somewhat flexible with their terms and documentation requirements. This flexibility can be particularly beneficial for fast-tracked or unconventional projects.

Conclusion

With the right college loan, you can acquire much-needed infrastructure development capital to build and create an enhanced learning environment that empowers students and faculty. Careful selection of lender proposals based on the institution’s needs ensures financial sustainability, which in turn contributes to the institution’s long-term growth and achievement of its goals.