A
GUIDE TO FINANCING YOUR EDUCATION
With
attractive interest rates, higher loan amounts, tax rebates and simplified
paperwork, taking an education loan is a good option now. Find out how to avail
of it.
Over 9 lakh
students have sweated over their Class XII examination in India. Come April,
there will be a scramble for college admissions. Considering the rising cost of
higher education, most parents and students will be desperately juggling their
finances. According to a calculator on cost of education provided by Aviva
India, a leading insurance player, the cost of a medical, engineering or
fashion designing degree in India is 7-10 lakh. An MBA degree’s cost starts at
around 5 lakh, but is 15-25 lakh at the better Indian B-schools. If you want a
foreign degree, be prepared to shell out double or even quadruple these costs.
The ideal solution would be free funding, say, scholarships. However, the competition is fierce and many students fall back on what they think is the next best free-money option: parents. Not too long ago, an Assocham survey revealed that 65% of Indian parents spend over half their yearly income on their child’s education. How fair is it to wipe out a parent’s retirement kitty in pursuit of the good life?
Thanks to the recent reforms and initiatives, it has never been easier to finance one’s own education. For instance, under the revised model education loan scheme designed by the Indian Banks’ Association, merit students taking admission in recognised private institutions under the management quota will also be eligible for study loans. In addition, the scope of the courses eligible for education loans from banks has been widened to include degrees/diplomas in nursing. Little wonder then that banks’ education loan portfolio has gone up from 42,300 crore in December 2010 to 52,100 crore in 2012, a jump of 23%. It also helps that the Reserve Bank of India (RBI) recently warned banks to not reject education loan applications just because a borrower does not fall under its service area.
A more significant factor fuelling this growth is the increasing availability of the product. Earlier, only public-sector banks offered it in deference to the government diktat. Over time, however, private players have joined the fray and, of late, two nonbanking financial companies (NBFCs) have also taken the plunge. Credila Financial Services commenced operations in 2008, and with HDFC’s backing after 2009, it has emerged as the largest private-sector education loan provider in India. More recently, Dewan Housing Finance has entered this space with Avanse Financial Services.
As a result of the increasing competition, loan seekers can now avail of better interest rates, higher loan amounts and a faster, hassle-free process. Typical education loan interest rates currently range between 11.5% and 14%, compared with 15-24% for personal loans and 13-15% for loans against securities.
So, if you are convinced and want to take the responsibility for your own future, go through this ready reckoner on loans.
Purpose of loan
The list of eligible expenses comprises the tuition fee for approved courses, including examination and library fee. The other main categories are:
• Hostel fees.
• Travel expenses or passage money for overseas education.
• Purchase of books and relevant equipment, including a computer, at reasonable costs.
• Expenses for project work or study tours. This is, however, typically limited to about 20% of the total tuition fee payable. The public-sector banks also offer a separate deal for vocational education and training.
Eligibility criteria
According to the model education loan scheme, the two broadest eligibility criteria are that the student must be an Indian national, and that he should have secured admission in an approved professional or technical course through an entrance test or selection process. In addition, some banks tack on the age criterion—the student should be 16-35 years old—or specify the minimum marks required in the last qualifying exam. Given that most banks have a margin money requirement of up to 5% of the loan for studying in India and 15% for foreign courses (for loans above 4 lakh), the applicants who are unable to drum up this amount are automatically rejected. For the record, margin money is the amount that the applicant needs to put up as down payment. Don’t forget to ask the lending institution whether a scholarship can be treated as margin money. Last, but not the least, remember that an earning parent, spouse, or guardian has to typically stand in as a co-applicant for the education loan.
Required documentation
Along with the completed loan application form, borrowers need to furnish proof of identity and residence, bank account statements and copies of income tax returns, marksheets of SSC, HSC and degree courses, as well as proof of admission and the fee schedule. In addition, you have to attach a copy of the scholarship letter and collateral documents, if applicable.
The trouble is that most foreign universities require students to furnish ‘proof of funds’ while applying for admission. However, banks won’t hand over a loan till you show them the admission letter. “Banks normally ask for the confirmed admission before accepting any education loan application. This puts the parents and students in a catch-22 situation while considering higher education because it is difficult for them to figure out their loan eligibility,” says Prashant A Bhonsle, country head, Credila. Responding to this dilemma, Credila offers a pre-loan sanction letter at the beginning of the college application process. Avanse, too, offers a pre-approved education loan to eligible students based on the creditworthiness of the co-borrower. However, this may warrant copies of more marksheets from you when you apply for the loan.
Repayment structure
Banks and NBFCs typically offer a repayment moratorium period of six months to one year after the completion of the course, or 3-6 months after the student bags a job. Thereafter, the loan has to be repaid within the specified tenure, ranging from five years to 15 years, depending on the lending institution and the loan amount. If the student is not able to complete the course within the scheduled time, banks may offer an extension of up to two years, not including the specified moratorium period.
Most banks offer a choice when it comes to repayment. Students can either service the interest component within the study and/or moratorium period, which typically fetches an interest concession of 1% off the regular rate, or start repaying the principal loan in the form of EMIs at the end of the grace period. Experts highly recommend in-school payments, if possible,
since it reduces the debt load that students face after graduation, which has a bearing on their future borrowing capacity. Avanse and Credila also allow partial interest servicing during the course period. In fact, Avanse is the first player in the country to introduce a step-up EMI option. Says Neeraj Saxena, business head, Avanse Education Loans: “Simply put, this is an option where Avanse takes into account your current financial condition and expected growth in income. So, the borrower can pay a lower EMI during the initial years of repayment and gradually increase the outflow as the tenure progresses.”
Such an income-linked repayment option is ideal for young borrowers as it helps manage the cash flow more efficiently without worrying about starting life with a huge debt. Though the Punjab National Bank website mentions a similar telescoping facility for select professions at the sole discretion of the sanctioning authority, a random check at a bank branch yielded no information. However, Credila is expected to follow suit before too long.
Tax benefits
Apart from convenience, education loans come with the incentive of a tax rebate. “The entire interest paid on the education loan is tax-deductible under Section 80E of the Income Tax Act,” explains a senior State Bank of India executive in Guwahati.
Credila has come up with an indicative chart on the tax savings possible under an education loan. For example, on a loan amount of 10 lakh at an interest rate of 13.5%, the yearly tax saving is 41,715. At the same rate of interest, the yearly tax savings on a 20 lakh loan is 83,430. In other words, the effective tax rate in both cases comes down to 9.33%.
Before you take a loan
Before zeroing in on a lending institution, take the time to compare more than the interest rates on offer. Some banks like the SBI and Axis Bank don’t charge a processing fee, but others do. Avanse charges a processing fee of 1-2% of the loan amount, and it is calculated on a case-to-case basis, while the PNB charges 270-500 depending on the loan amount. Some banks may also ask for additional security. Check the fine print to avoid disappointment at the last minute.
It’s worth remembering that some premier institutes offer lower interest rates than the less-famous ones. For instance, the Oriental Bank of Commerce offers an interest rate of 10.25%, or the base rate, for students of IIMs, IITs, XLRIs and ISB. The rate for all other institutions and courses ranges from 12.75-13.25%. At PNB, the rate is 10.75%-11.25%, compared with the regular rate of 13-14%.
Besides, women are eligible for cheaper loans. A discount of 0.5-1% on the regular rate is applicable, at least in public-sector banks. Also, applicants with a family income less than 4.5 lakh a year are eligible for an interest rate subsidy from scheduled banks under a scheme by the Ministry of Human Resource Development. Such students only have to repay the principal loan amount; the interest comes from the central government coffers.
Under the IBA scheme, an education loan should typically be sanctioned or rejected within 15 days of the receipt of the completed application with supporting documents. Any rejection warrants a written explanation to the applicant. If you don’t hear from the bank within 30 days, you can approach the banking ombudsman.
The problems
While there is a lot to be said in favour of study loans, the current product is far from perfect. To begin with, while there are more players in the field than ever before, the demand far outstrips supply. “Industry estimates suggest that only 16% of the current feasible opportunity is being met by the incumbent players,” says Saxena, adding that “there is a huge untapped opportunity where the annual spend on higher education is close to 80,000 crore”.
Private banks usually balk at offering this product. For instance, ICICI Bank does not have a specific study loan, while the HDFC Bank executives admit that “we offer it but are not actively promoting this loan”. What this means is that you will have to put in the effort to find out about the bank branches where somebody can help you with your queries regarding this loan.
“The reason for this reluctance is that there is a risk involved with education loans,” explains Harsh Roongta, CEO, Apnapaisa. Not only is it not linked to the borrower’s current income level, as most other loans are, but it is also disproportionately cheaper than all the other types of unsecured loans. Moreover, not all lending institutions boast the specialised skills required to make the judgement call that an education loan entails: calculating the odds of the borrower completing his course and subsequently bagging a salary that can accommodate the EMI servicing.
This explains why so many people have to fall back on a personal loan to finance their studies despite the higher interest rate applicable. In fact, according to the RBI data, personal loans for education have jumped from 43,200 crore to 54,200 crore between December 2010 and December 2012, a higher jump than that posted by the so-called priority sector education loans. Making matters worse is the fact that the loan limits on education loans, particularly under IBA’s scheme, are far from adequate. Says Vineet Gupta, director of Jamboree, a specialised preparation and training institute for overseas education: “The typical cap of 20 lakh for loans to study abroad is not sufficient in most cases as it covers the cost of education for just one year. Most programs in the US span two years, so students have to drum up their own finances or manage through scholarships and/or part-time jobs.” Other industry watchers point out that the margin money requirement is a hindrance. Doing away with this and introducing higher loan amounts are the trump cards that the NBFCs are offering. “Indian students can avail of any quantum of education loan based on their eligibility. In the
past, Credila has approved education loans of more than 1 crore,” says Bhonsle. There is a lot to be said for the doorstep services offered by both the NBFCs, but you will have to pay higher interest rates for these conveniences (see table).
The biggest stress point, especially in current times where the job and economic outlook is far from optimistic, is one’s ability to repay study loans. “The looming EMIs were definitely a mood dampener for me and my classmates during placement season last year. The big worry was landing a job that would pay well enough to repay the huge loans while sustaining ourselves in a foreign country,” says Amit Saxena, who passed out of the London Business School last year and is now working for an MNC in the UK.
Rising delinquencies
According to a recent Assocham paper, only 10% of the graduates from Indian business schools—excluding the top 20 schools—get a job immediately after completing their course. A similar story plays out for most of the other courses. With no jobs in hand, how is one to start repaying the study loan? Little wonder then that banks are seeing a rise in bad debts. “The non-performing assets in education loans are between 5% and 8% depending on who you ask,” says a source at the SBI. Given that borrowers don’t need to put up any collateral or third-party guarantee for loans of less than 4 lakh, this is the segment that is witnessing the highest delinquency.
In response, banks have adopted a very cautious approach to doling out study loans. While there is a safety net, whereby loans of over 7.5 lakh need to be backed by a collateral, banks are also leaning in favour of meritorious students heading for well-known colleges.
As for the accepted collateral, you can typically choose between residential property, fixed deposits assigned to the lending agency and life insurance policies. Some banks also allow the National Savings Certificates, gold, government securities, and shares/debenture/mutual fund certificates.
Keep in mind that sometimes a lending agency, especially banks, will demand a 100% security value for its education loan, particularly for higher amounts. However, the security coverage will vary from case to case depending on the applicant’s merit and creditworthiness. “Credila gives due weightage to the student’s talent and academic track record, and may offer a relatively larger education loan against partial collateral security for talented students. This may not be possible with a bank,” says Bhonsle.
The way out
What happens if a borrower is unable to service his study loan? “Most banks will wait for one or two months of EMI noshows. However, if the repayment, along with the relevant penalty, is not forthcoming even after this period, the bank will typically issue a notice. If
subsequent attempts to contact the
loan guarantor do not bear fruit, the pledged collateral could be taken into the bank’s possession,” cautions the SBI executive. Usually, a penal interest of 2% over the regular rate of interest is charged on the payable amount for the overdue period.
However, don’t waste study time thinking up nightmarish scenarios of ageing parents being turned out of the house that they put up as collateral. Says Roongta: “Banks won’t rush to repossess because it is not only messy, but also expensive.” Anyway, there is a window of at least three months for you to get your act together. The business of issuing the notice of intent alone takes time.
That’s not to say that the applicants for the 3.9 lakh loan—or less—need not worry about repayment at all. The damage to their credit report in case of a default will quickly dry out the future lines of credit.
So, if you are in a position where EMI payouts look difficult, immediately contact your loan provider and update it about the situation. Says Bhonsle: “Our endeavour is to structure the loan in such a way that the potential employability, as well as income, is considered at the time of deciding the tenure of the loan. However, in extreme circumstances, Credila works with the students and parents through their difficult time to find the best possible solution that is mutually beneficial.”
According to industry insiders, based on your negotiation skills and profile, the banks may be willing to cut you some slack, be it in terms of a lower EMI over a longer tenure or an extension of the moratorium period. One way to avoid being in this situation is to opt for an in-course interest repayment option mentioned earlier.
The incumbent players, meanwhile, are focusing on ways to improve credit practices. “We believe that the rising defaults are the effect of operational lethargy in the system rather than the borrower’s unwillingness to repay. Proper credit practices and proactive postdisbursement operations can mitigate these issues,” says Saxena of Avanse.
The way forward
The biggest deterrent to pushing education loans is the risk factor involved. Experts believe that India is the only country where study loans are offered without a Credit Guarantee Fund in place. Such a scheme has already been proposed in the country. Once it comes into being, banks will enjoy up to 75% guaranteed cover for bad loans. Bankers predict that the introduction of such a fund will pave the way for lower interest rates, while upping the ceiling on security-free loans to 7.5 lakh.
Says Roongta: “The Credit Guarantee Fund should have started this year, but the norms are not out yet. Chances are this will finally be in place in 2014-15.” That should be welcome news for a market already growing at a CAGR of around 30%. “I see three or four more education loan firms coming into play in the near future. It will not be amiss to say that education loans are at a stage where housing loans were at the time that the HDFC first came in. This is a market waiting to explode,” adds Roongta.
The ideal solution would be free funding, say, scholarships. However, the competition is fierce and many students fall back on what they think is the next best free-money option: parents. Not too long ago, an Assocham survey revealed that 65% of Indian parents spend over half their yearly income on their child’s education. How fair is it to wipe out a parent’s retirement kitty in pursuit of the good life?
Thanks to the recent reforms and initiatives, it has never been easier to finance one’s own education. For instance, under the revised model education loan scheme designed by the Indian Banks’ Association, merit students taking admission in recognised private institutions under the management quota will also be eligible for study loans. In addition, the scope of the courses eligible for education loans from banks has been widened to include degrees/diplomas in nursing. Little wonder then that banks’ education loan portfolio has gone up from 42,300 crore in December 2010 to 52,100 crore in 2012, a jump of 23%. It also helps that the Reserve Bank of India (RBI) recently warned banks to not reject education loan applications just because a borrower does not fall under its service area.
A more significant factor fuelling this growth is the increasing availability of the product. Earlier, only public-sector banks offered it in deference to the government diktat. Over time, however, private players have joined the fray and, of late, two nonbanking financial companies (NBFCs) have also taken the plunge. Credila Financial Services commenced operations in 2008, and with HDFC’s backing after 2009, it has emerged as the largest private-sector education loan provider in India. More recently, Dewan Housing Finance has entered this space with Avanse Financial Services.
As a result of the increasing competition, loan seekers can now avail of better interest rates, higher loan amounts and a faster, hassle-free process. Typical education loan interest rates currently range between 11.5% and 14%, compared with 15-24% for personal loans and 13-15% for loans against securities.
So, if you are convinced and want to take the responsibility for your own future, go through this ready reckoner on loans.
Purpose of loan
The list of eligible expenses comprises the tuition fee for approved courses, including examination and library fee. The other main categories are:
• Hostel fees.
• Travel expenses or passage money for overseas education.
• Purchase of books and relevant equipment, including a computer, at reasonable costs.
• Expenses for project work or study tours. This is, however, typically limited to about 20% of the total tuition fee payable. The public-sector banks also offer a separate deal for vocational education and training.
Eligibility criteria
According to the model education loan scheme, the two broadest eligibility criteria are that the student must be an Indian national, and that he should have secured admission in an approved professional or technical course through an entrance test or selection process. In addition, some banks tack on the age criterion—the student should be 16-35 years old—or specify the minimum marks required in the last qualifying exam. Given that most banks have a margin money requirement of up to 5% of the loan for studying in India and 15% for foreign courses (for loans above 4 lakh), the applicants who are unable to drum up this amount are automatically rejected. For the record, margin money is the amount that the applicant needs to put up as down payment. Don’t forget to ask the lending institution whether a scholarship can be treated as margin money. Last, but not the least, remember that an earning parent, spouse, or guardian has to typically stand in as a co-applicant for the education loan.
Required documentation
Along with the completed loan application form, borrowers need to furnish proof of identity and residence, bank account statements and copies of income tax returns, marksheets of SSC, HSC and degree courses, as well as proof of admission and the fee schedule. In addition, you have to attach a copy of the scholarship letter and collateral documents, if applicable.
The trouble is that most foreign universities require students to furnish ‘proof of funds’ while applying for admission. However, banks won’t hand over a loan till you show them the admission letter. “Banks normally ask for the confirmed admission before accepting any education loan application. This puts the parents and students in a catch-22 situation while considering higher education because it is difficult for them to figure out their loan eligibility,” says Prashant A Bhonsle, country head, Credila. Responding to this dilemma, Credila offers a pre-loan sanction letter at the beginning of the college application process. Avanse, too, offers a pre-approved education loan to eligible students based on the creditworthiness of the co-borrower. However, this may warrant copies of more marksheets from you when you apply for the loan.
Repayment structure
Banks and NBFCs typically offer a repayment moratorium period of six months to one year after the completion of the course, or 3-6 months after the student bags a job. Thereafter, the loan has to be repaid within the specified tenure, ranging from five years to 15 years, depending on the lending institution and the loan amount. If the student is not able to complete the course within the scheduled time, banks may offer an extension of up to two years, not including the specified moratorium period.
Most banks offer a choice when it comes to repayment. Students can either service the interest component within the study and/or moratorium period, which typically fetches an interest concession of 1% off the regular rate, or start repaying the principal loan in the form of EMIs at the end of the grace period. Experts highly recommend in-school payments, if possible,
since it reduces the debt load that students face after graduation, which has a bearing on their future borrowing capacity. Avanse and Credila also allow partial interest servicing during the course period. In fact, Avanse is the first player in the country to introduce a step-up EMI option. Says Neeraj Saxena, business head, Avanse Education Loans: “Simply put, this is an option where Avanse takes into account your current financial condition and expected growth in income. So, the borrower can pay a lower EMI during the initial years of repayment and gradually increase the outflow as the tenure progresses.”
Such an income-linked repayment option is ideal for young borrowers as it helps manage the cash flow more efficiently without worrying about starting life with a huge debt. Though the Punjab National Bank website mentions a similar telescoping facility for select professions at the sole discretion of the sanctioning authority, a random check at a bank branch yielded no information. However, Credila is expected to follow suit before too long.
Tax benefits
Apart from convenience, education loans come with the incentive of a tax rebate. “The entire interest paid on the education loan is tax-deductible under Section 80E of the Income Tax Act,” explains a senior State Bank of India executive in Guwahati.
Credila has come up with an indicative chart on the tax savings possible under an education loan. For example, on a loan amount of 10 lakh at an interest rate of 13.5%, the yearly tax saving is 41,715. At the same rate of interest, the yearly tax savings on a 20 lakh loan is 83,430. In other words, the effective tax rate in both cases comes down to 9.33%.
Before you take a loan
Before zeroing in on a lending institution, take the time to compare more than the interest rates on offer. Some banks like the SBI and Axis Bank don’t charge a processing fee, but others do. Avanse charges a processing fee of 1-2% of the loan amount, and it is calculated on a case-to-case basis, while the PNB charges 270-500 depending on the loan amount. Some banks may also ask for additional security. Check the fine print to avoid disappointment at the last minute.
It’s worth remembering that some premier institutes offer lower interest rates than the less-famous ones. For instance, the Oriental Bank of Commerce offers an interest rate of 10.25%, or the base rate, for students of IIMs, IITs, XLRIs and ISB. The rate for all other institutions and courses ranges from 12.75-13.25%. At PNB, the rate is 10.75%-11.25%, compared with the regular rate of 13-14%.
Besides, women are eligible for cheaper loans. A discount of 0.5-1% on the regular rate is applicable, at least in public-sector banks. Also, applicants with a family income less than 4.5 lakh a year are eligible for an interest rate subsidy from scheduled banks under a scheme by the Ministry of Human Resource Development. Such students only have to repay the principal loan amount; the interest comes from the central government coffers.
Under the IBA scheme, an education loan should typically be sanctioned or rejected within 15 days of the receipt of the completed application with supporting documents. Any rejection warrants a written explanation to the applicant. If you don’t hear from the bank within 30 days, you can approach the banking ombudsman.
The problems
While there is a lot to be said in favour of study loans, the current product is far from perfect. To begin with, while there are more players in the field than ever before, the demand far outstrips supply. “Industry estimates suggest that only 16% of the current feasible opportunity is being met by the incumbent players,” says Saxena, adding that “there is a huge untapped opportunity where the annual spend on higher education is close to 80,000 crore”.
Private banks usually balk at offering this product. For instance, ICICI Bank does not have a specific study loan, while the HDFC Bank executives admit that “we offer it but are not actively promoting this loan”. What this means is that you will have to put in the effort to find out about the bank branches where somebody can help you with your queries regarding this loan.
“The reason for this reluctance is that there is a risk involved with education loans,” explains Harsh Roongta, CEO, Apnapaisa. Not only is it not linked to the borrower’s current income level, as most other loans are, but it is also disproportionately cheaper than all the other types of unsecured loans. Moreover, not all lending institutions boast the specialised skills required to make the judgement call that an education loan entails: calculating the odds of the borrower completing his course and subsequently bagging a salary that can accommodate the EMI servicing.
This explains why so many people have to fall back on a personal loan to finance their studies despite the higher interest rate applicable. In fact, according to the RBI data, personal loans for education have jumped from 43,200 crore to 54,200 crore between December 2010 and December 2012, a higher jump than that posted by the so-called priority sector education loans. Making matters worse is the fact that the loan limits on education loans, particularly under IBA’s scheme, are far from adequate. Says Vineet Gupta, director of Jamboree, a specialised preparation and training institute for overseas education: “The typical cap of 20 lakh for loans to study abroad is not sufficient in most cases as it covers the cost of education for just one year. Most programs in the US span two years, so students have to drum up their own finances or manage through scholarships and/or part-time jobs.” Other industry watchers point out that the margin money requirement is a hindrance. Doing away with this and introducing higher loan amounts are the trump cards that the NBFCs are offering. “Indian students can avail of any quantum of education loan based on their eligibility. In the
past, Credila has approved education loans of more than 1 crore,” says Bhonsle. There is a lot to be said for the doorstep services offered by both the NBFCs, but you will have to pay higher interest rates for these conveniences (see table).
The biggest stress point, especially in current times where the job and economic outlook is far from optimistic, is one’s ability to repay study loans. “The looming EMIs were definitely a mood dampener for me and my classmates during placement season last year. The big worry was landing a job that would pay well enough to repay the huge loans while sustaining ourselves in a foreign country,” says Amit Saxena, who passed out of the London Business School last year and is now working for an MNC in the UK.
Rising delinquencies
According to a recent Assocham paper, only 10% of the graduates from Indian business schools—excluding the top 20 schools—get a job immediately after completing their course. A similar story plays out for most of the other courses. With no jobs in hand, how is one to start repaying the study loan? Little wonder then that banks are seeing a rise in bad debts. “The non-performing assets in education loans are between 5% and 8% depending on who you ask,” says a source at the SBI. Given that borrowers don’t need to put up any collateral or third-party guarantee for loans of less than 4 lakh, this is the segment that is witnessing the highest delinquency.
In response, banks have adopted a very cautious approach to doling out study loans. While there is a safety net, whereby loans of over 7.5 lakh need to be backed by a collateral, banks are also leaning in favour of meritorious students heading for well-known colleges.
As for the accepted collateral, you can typically choose between residential property, fixed deposits assigned to the lending agency and life insurance policies. Some banks also allow the National Savings Certificates, gold, government securities, and shares/debenture/mutual fund certificates.
Keep in mind that sometimes a lending agency, especially banks, will demand a 100% security value for its education loan, particularly for higher amounts. However, the security coverage will vary from case to case depending on the applicant’s merit and creditworthiness. “Credila gives due weightage to the student’s talent and academic track record, and may offer a relatively larger education loan against partial collateral security for talented students. This may not be possible with a bank,” says Bhonsle.
The way out
What happens if a borrower is unable to service his study loan? “Most banks will wait for one or two months of EMI noshows. However, if the repayment, along with the relevant penalty, is not forthcoming even after this period, the bank will typically issue a notice. If
subsequent attempts to contact the
loan guarantor do not bear fruit, the pledged collateral could be taken into the bank’s possession,” cautions the SBI executive. Usually, a penal interest of 2% over the regular rate of interest is charged on the payable amount for the overdue period.
However, don’t waste study time thinking up nightmarish scenarios of ageing parents being turned out of the house that they put up as collateral. Says Roongta: “Banks won’t rush to repossess because it is not only messy, but also expensive.” Anyway, there is a window of at least three months for you to get your act together. The business of issuing the notice of intent alone takes time.
That’s not to say that the applicants for the 3.9 lakh loan—or less—need not worry about repayment at all. The damage to their credit report in case of a default will quickly dry out the future lines of credit.
So, if you are in a position where EMI payouts look difficult, immediately contact your loan provider and update it about the situation. Says Bhonsle: “Our endeavour is to structure the loan in such a way that the potential employability, as well as income, is considered at the time of deciding the tenure of the loan. However, in extreme circumstances, Credila works with the students and parents through their difficult time to find the best possible solution that is mutually beneficial.”
According to industry insiders, based on your negotiation skills and profile, the banks may be willing to cut you some slack, be it in terms of a lower EMI over a longer tenure or an extension of the moratorium period. One way to avoid being in this situation is to opt for an in-course interest repayment option mentioned earlier.
The incumbent players, meanwhile, are focusing on ways to improve credit practices. “We believe that the rising defaults are the effect of operational lethargy in the system rather than the borrower’s unwillingness to repay. Proper credit practices and proactive postdisbursement operations can mitigate these issues,” says Saxena of Avanse.
The way forward
The biggest deterrent to pushing education loans is the risk factor involved. Experts believe that India is the only country where study loans are offered without a Credit Guarantee Fund in place. Such a scheme has already been proposed in the country. Once it comes into being, banks will enjoy up to 75% guaranteed cover for bad loans. Bankers predict that the introduction of such a fund will pave the way for lower interest rates, while upping the ceiling on security-free loans to 7.5 lakh.
Says Roongta: “The Credit Guarantee Fund should have started this year, but the norms are not out yet. Chances are this will finally be in place in 2014-15.” That should be welcome news for a market already growing at a CAGR of around 30%. “I see three or four more education loan firms coming into play in the near future. It will not be amiss to say that education loans are at a stage where housing loans were at the time that the HDFC first came in. This is a market waiting to explode,” adds Roongta.
SUSHMITA
CHOUDHURY AGARWAL ETW 130325
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