Education loan to get costlier

Banks, stung by bad loans from lending to the education sector, are buying insurance to cover default risk that will eventually increase the cost of borrowing for students. Under the cover, the bank will receive the entire loan amount from the insurer if the borrower dies. The cost of insurance cover with education loan is 2-3% of the loan size. The policy is of the value of the loan and assigned in favour of the bank. Banks offer this product when they disburse loans but like a home loan, it is not made compulsory with the loan. Generally, education loans are repaid in four to five years.

The total education loan size is Rs. 5,510 crore (Rs. 55.1 billion), according to the latest data provided by the Reserve Bank of India (RBI). While the ratio of bad loans was 4.5% in 2011-12, banking analysts expect another 100 basis points rise in bad loans during last year. Sensing an opportunity, Canara HSBC OBC is planning to launch life insurance term plan education loans. “We see opportunity in the education loan segment, and a student suffers if something goes wrong with the parent,” said an executive of the company.

“Education under personal insurance is one of the products we are offering and it gives security to a bank,” said M Narendra, Chairman and Managing Director, Indian Overseas Bank. “We are not aggressively pushing it, but may look at it,” he added.

Looking at the job market scenario and poor campus placement, banks have been cautiously bringing down the share of education loans over the past couple of years. It grew by 10% in 2012-13 while the overall credit grew 14%.

“The commerciality of the education loan has come down significantly with the growing NPA,” said an analyst with a broking firm requesting anonymity. “It will be difficult to give out education loans without any kind of guarantee but insurance cover will add to the cost.”

IDBI Federal Life Insurance provides term cover with education loan borrowers of IDBI and Federal Bank. “Penetration of insurance cover with education loan is very low with only 25-30% while home loan has higher cover of 70-75%,” said G V Nageswara Rao MD and CEO IDBI Federal Life Insurance. “The success of the product will depend on the ability of the borrower to pay for the insurance.”

Source: The Economic Times, May 20, 2013

Banks may extend time for student loan repayment

Students borrowing from banks to pursue higher studies or even vocational courses are set to get a breather as banks would extend their repayment period by a few years. The repayment period for students would now be enhanced to 10 years, while in some cases they can even extend it to 15 years, depending on the size of the loan, a circular issued by the Indian Banks’ Association said. Earlier, students had to repay within a period of seven years.

Apart from rating students to assess their repayment capacity and thereby determining their interest rates, the finance ministry has recently directed banks to make credit for students affordable with easier terms and conditions. Besides, the government has also advised banks to provide short-term loans ranging from Rs. 20,000 to Rs. 150,000 for vocational courses.

Union Finance Minister P. Chidambaram has asked banks to ensure that all loan applications from students must be considered. Bank officials could even be penalised for not honouring cases. He has also asked banks to increase penetration of education loans especially in the northeast and Union territories. “We want to provide education loans to all, our branch managers are taking every step to facilitate this and help students,” said TM Bhasin, Chairman and Managing Director, Indian Bank.

However, students need to be careful with their repayment exercise as Credit Information Bureau (India) Ltd. (CIBIL), that tracks credit history and assesses credit worthiness for borrowers, said credit score of the student would be impacted in case of defaults in repayment. “If a student defaults on the education loan, it will negatively impact her credit history and score and may impact the chances of getting a loan in the future like the dream home or the car she aspires,” said Arun Thukral, Managing Director, CIBIL.

Source: Hindustan Times, September 7, 2012

Education loan defaults becoming a problem

The rising number of defaults among educational loans is a serious concern for banks, and keeping track of students after the completion of their course a huge challenge, said the chief executive of Indian Banks’ Association (IBA) in Bangalore.

The issue of loans turning bad is becoming a problem for banks of late, said Mr. K. Ramakrishnan, Chief Executive, IBA, at an interaction between Karnataka-based banks and heads of educational institutions in Bangalore, organised by Canara Bank.

The interaction was part of a series of interactive meetings proposed by the Ministry of Finance and IBA with various stake-holders in the education sector. He pointed out that as on March 31, 2011, the non-performing assets (NPAs) in the educational loan segment stood at Rs. 1,600 crore (Rs. 16 billion) from over 100,000 accounts.

Educational loans outstanding in public sector banks as on March 31, 2011, was Rs. 43,074 crore (Rs. 430.74 billion), from over 220,000 accounts. He also said that the Ministry of Finance is thinking of how best banks and educational institutions can work together to make educational loan schemes more meaningful with merit as an eligibility criteria.

Rating system
Mr. Ramakrishnan suggested that educational institutions be rated by banks, based on their placement record, which would also help banks decide on the sanction of loans to students joining such institutions. He also urged the colleges to spread awareness on the Central Sector Interest Subsidy scheme for inland studies for students from the economically weaker sections with parental income of up to Rs. 450,000 during the moratorium period. So far, Rs. 842 crore (Rs. 8.42 billion) of subsidy has been processed and over 900,000 students have benefited, he said.

High cost of education
Mr. S. Raman, Chairman and Managing Director, Canara Bank, said that there was a mismatch between the higher cost of education and the potential income levels of students after completion of education in some professional courses, which had to be addressed.

The government’s proposal for a credit guarantee scheme for educational loans would help make interest rates “finer”, he added. Mr. Raman admitted that his bank was witnessing signs of stress in the educational loan segment of late, which was not the case earlier.

Source: The Hindu Business Line, February 20, 2012

Study loans becoming cheaper in India

After rising for two years, interest rates have finally started softening, providing the much-needed relief to retail customers. State Bank of India (SBI) – the country’s largest lender – has reduced interest rates on education loans by 25-100 bps across various maturities. The new rates would be effective from Monday. For a loan of Rs. 400,000, the interest rate has been reduced by 25 bps to 11.75 per cent, while for loans between Rs. 400,000 and 750,000, the rate reduction is 100 bps to 12.50 per cent. And, for the loans of above Rs. 750,000, rates have been cut 25 bps to 12.25 per cent.

SBI also offers a concession of 50 bps on interest rates for loans given to female students. Education loans, which constitute about seven per cent of SBI’s Rs. 1.75-lakh-crore (Rs. 1.75 trillion) retail portfolio, saw a growth of 14.17 per cent as of December-end.

Another state-run lender, Central Bank of India, has announced a reduction of 25-50 bps on home loan rates to boost credit demand, which has seen a slow growth in the current financial year. Prospective customers of Central Bank will now be charged 10.75 per cent for loans of up to Rs. 3 million. For loans between Rs. 3 million and Rs. 7.5 million, rates have been reduced by 50 bps. For those more than Rs. 7.5 million, the new rate is 11.25 per cent, revised from 11.50 per cent. The repayment period for these offers is between 10 and 25 years. The Mumbai-based lender has also waived processing fees on home loans. It on Saturday said the new rates would be offered till March 31.

Banks are now becoming aggressive to push loan growth to meet the target for the current financial year. Banks have to indicate their targets to the finance ministry in the statement of intent at the beginning of every financial year. Central Bank of India has set a target of raising its home loan book by Rs. 500 crore (Rs. 5 billion) this quarter, on the base of a housing loan book of Rs. 6,000 crore (Rs. 60 billion). “At present, private sector banks like ICICI Bank and HDFC offer better rates than us,” a Central Bank of India official said. The bank’s total retail portfolio, including home loans, was Rs. 15,130 crore (Rs. 151.3 billion) at the end of December 31, 2011, up 35.48 per cent from Rs. 11,168 crore (Rs. 111.68 billion) a year ago.

On Friday, Bank of Maharahstra also announced a reduction of 10 bps in its base rate to 10.60 per cent. It offers home loans of up to Rs. 500,000 at the base rate. The Pune-based lender has also waived processing charges for home loans of up to Rs. 2.5 million.

Even as banks are not yet reducing their base rates – the benchmark lending rate to which all rates are linked – those may do so once the Reserve Bank of India (RBI) starts cutting interest rates. After raising the key policy rate 13 times between March 2010 and October 2011, the central bank has now pressed the pause button on its rate increase cycle and it has not raised the policy rates in the last two policy meetings.

Market participants said RBI would cut interest rates from the April policy, if not March, as inflation is now showing signs of easing after staying high for nearly two years. In January, inflation rate fell to 6.55 per cent, which was close to the central bank’s projection of 7 per cent inflation rate at the end of March.

Source: Business Standard, February 19, 2012

State-run Banks Yield to Government: To ease study loan rules

At a time when rising defaults from education loans are haunting Indian state-run lenders, the government has asked banks to increase their share of such loans in total credit portfolio. Under pressure from the government, banks, that had turned reluctant to fund more students, have decided to revamp their education loan schemes by increasing the credit tenure and funding more than one person per family for loans up to Rs. 400,000.

“The revised scheme is forwarded to the government. It will be more customer-friendly and cover a large number of applicants,” said K. Unnikrishnan, Deputy Chief Executive at Indian Banks Association (IBA), which recommended the modifications to student loans after reviewing the current model. At present, banks do not seek collateral on education loans up to Rs. 400,000; loans above Rs. 400,000 require joint application and collateral.

IBA has proposed that banks will now consider more than one member of the family for loans below Rs. 400,000. Currently, as a safeguard measure against defaults, most banks don’t give loans to more than one member of a family. At times it would happen that the elder child would get the loan while younger ones would not get loan benefit. “This will change under the scheme as all members of a family would be considered on merit,” said Mr. Unnikrishnan.

Banks are also considering extension of loan tenure to 10-15 years from 5-7 years, he said. Banks have also told the government they will inform an applicant about the estimated processing time before a loan is given. If a loan is rejected, the reason for refusal will be communicated to the applicant, who will also be given an application number and details of the authority to be approached for grievance redressal.

Concerned over burgeoning bad debt, state-run banks recorded a decline in growth of new education loan accounts in the year ended March. New accounts grew at 10%, much lower than 20-30 % growth registered in the past. Andhra Bank reported 9% decline in new-student loan accounts. However, total loan outstanding of PSU banks in FY11 increased 20% from a year earlier to Rs. 43,073 crore (Rs. 430.73 billion). “Even as we would like to expand this portfolio, NPA (non-performing assets) is a concern,” said Corporation Bank Chairman & Managing Director Ramnath Pradeep.

Source: The Economic Times, August 5, 2011

Government seeks more clarity on education loans

The Ministry of Finance wants state-owned banks to define the terms and conditions for sanctioning education loans in an effort to reduce arbitrary decisions by bank officials. In draft guidelines circulated to the banks last week, the government has suggested steps to make the process of sanctioning and disbursing education loans more transparent, customer friendly and standardized.

A finance ministry official who did not want to be identified said the current system is heavily dependant on the discretion of the branch manager of the bank. The ministry wants “approval conditions” defined so as to reduce this discretion, this person added. Bankers said the government also wants to ensure students understand the terms of the loan contract. “It is clearly in banks’ interests also if the student understands the terms and conditions well. It will help banks reduce the NPAs (non-performing assets) in this segment,” said Vivek Mhatre, General Manager in-charge of retail banking at Union Bank of India.

The education loan portfolio of public sector banks stood at Rs. 43,074 crore (Rs. 430.74 billion) on 31 March. Bankers say defaults in this segment are 2-5% of the portfolio. Defaults are higher in loans of less than Rs. 400,000, where banks cannot ask for collateral or personal guarantees.

The ministry has proposed that banks give loan applicants the name of a bank executive they can approach to track the status of their application. It has also asked banks to tell applicants how much money they can borrow to meet additional expenses besides the tuition fee.

Students generally take a student loan to pay tuition fees and meet additional expenses such as hostel fees, books, laptops and field visits. Banks transfer the tuition fees directly to the institutes but release the additional expenditure to the students.

“They (banks) can clearly state that the additional expenses ceiling will be a certain percentage of the tuition fees, say 50%,” the ministry official said. “At present, it is left to the discretion of every bank manager who may sometimes feel that the student is overstating the additional expenses. Each bank can decide its own limit.”

The ministry has suggested that bank branches compile the placement track record of institutes in their area and consider that as the basis for approving student loans.

“A bank branch can compile the placement data of colleges in that particular area to determine the loan paying capacity of the borrower. This will ensure that there is no discrimination between students from the same college—where one is given a loan and the other is not,” the ministry official said. “This is particularly so in loan applications below Rs.4 lakh, where the borrower does not need to give any collateral.”

The ministry has also asked banks to clearly state that a loan taken during the so-called moratorium period will be classified as a second education loan. Banks typically let students complete their course and take a year to get a job before they start repaying the loan—this is known as the moratorium period.

Currently, a second loan is defined as a loan taken immediately after the first loan, but the ministry official said the interpretation of “immediately” can vary depending on the discretion of a bank official.

The ministry’s move follows a report submitted by a committee constituted by Indian Banks’ Association (IBA) to suggest modifications in the model education loan scheme launched in 2001-02.

The committee, headed by Indian Bank chairman and managing director T.M. Bhasin, has recommended the creation of a credit guarantee fund financed by the banks and the government. Banks can use this fund to recover losses from bad education loans.

The ministry official quoted above said the government is open to the creation of a credit guarantee fund and has asked IBA for a detailed proposal.

Source: Mint, July 20, 2011

Public sector banks turning cautious on education loans

Public sector banks are turning cautious in handing out education loans as some of their earlier grants to the sector have turned sticky. This is even as the loan exposure of public sector banks for education has been on the rise and touched a level of Rs. 430.74 billion in end March 2011 from Rs. 45.50 billion in March-end 2010.

Although the number of education loan accounts is on the rise, the year-on-year growth rate has been showing a declining trend in number of accounts as well as in the amount. Bankers attribute slower growth partly to the fact that loans handed out between 2003 and 2005 are now being repaid. Education loan tenures have been around four to five years, and there is also a year’s moratorium for repayment.

But bankers equally admit to reluctance in making loans now — unlike in the past when they aggressively sought out students as well as parents. Bankers admit to problems in recovery, especially for education loans up to Rs. 400,000 on which the borrowers are not required to provide margin money or security.

“Our estimates are that 10-15 per cent of the outstanding loans to the sector may have turned bad, with the bulk of it in the sub-Rs. 400,000 size,” a top official from a leading public-sector bank told Business Line. The gamut of issues around education loans and the public sector’s performance related to them will come up for discussion at the Finance Minister, Mr. Pranab Mukherkee’s meeting with chief executives of public sector banks on Friday.

At the meeting, the chief executives of the banks are expected to present the progress on the implementation of education loan schemes and constraints, if any, in expanding coverage under the scheme. The Indian Banks Association had prepared a model educational-loan scheme in the year 2001, which was circulated to banks for implementation by the Reserve Bank of India in April 2001.

This scheme was subsequently modified in 2004 and guidelines for the revised model educational-loan scheme were issued in August 2004 by the association. Based on recommendations of a working group and suggestions from the Government, the scheme was again modified in 2007-08. The association had recently proposed modifications in the education loan scheme and the revision is likely to be finalised shortly.

Source: The Hindu Business Line, July 8, 2011

>Education loan norms to be reworked to cut bad debt

>Millions of students seeking bank loans for higher studies and professional courses may soon get more time to repay after finding a job, but those who don’t have sufficient academic credentials and are getting admission through other means such as donation and “quotas” may find it tough to get money from banks. Concerned over a rise in default rates in loans given to students, Indian banks are re-working the existing norms to give such advances.

The Indian Banks’ Association (IBA), the industry lobby of lenders, has constituted an expert committee under Indian Bank Chairman & Managing Director T.M. Bhasin to modify the so-called education loan scheme. This scheme was launched in 2001-02 by the then finance minister Yashwant Sinha in a budget announcement. It was later modified in 2004-05, when P. Chidambaram was the finance minister. “Since banks are not allowed to ask security for loans (of) up to Rs. 400,000 under the current scheme, there is a problem in the business. Some of the students are not getting jobs. What we, therefore, intend to do is track students’ progress. There is some extension required (for repayment),” Bhasin said.

The committee, which is expected to submit its report by the end of this month, is planning to make some sort of security mandatory for loans given to those students who are securing admissions not by merit, but through recommendations or hefty donations. The committee is also expected to plug the loopholes in the loan sanctioning process. Often banks are compelled to give loans to students under pressure from politicians and people of influence in rural and semi-urban pockets even when they are not fully convinced about the credentials of the students, according a member of the Bhasin panel. “A student typically pays more money when the ad- mission is not through merit alone and in such cases banks might ask for some security,” the member said. He did not want to be named as the panel is yet to finalize its report.

Bankers blame the practice in many private colleges, particularly in south India, to “auction” seats to students who are not otherwise eligible for admission, for the rising non-performing assets (NPAs) in their education loan portfolios. Such students often fail to find a job on completion of their course and hence cannot repay bank loans, leading to defaults. According to the latest Reserve Bank data, Indian banks’ education loans outstanding rose to Rs. 43,801 crore (Rs. 438.01 billion) as on February-end, up 19.93%, from Rs. 36,522 crore (Rs. 365.22 billion) in the same period last year. Around 1-3% of such loans are NPAs, with the actual percentage varying from bank to bank. The committee is likely to extend the repayment period of education loans from five-seven years now to up to 10 years to facilitate repayment and reduce the probability of default, the member quoted above said.

Typically, banks lend to students at 10-11% for a tenure of five-seven years. Under the current norms, banks cannot accept any security for loans up to Rs. 400,000. For loans between Rs. 400,000 and Rs. 750,000, they can ask for personal guarantees from any working individual. For loans of even higher amount, collateral is necessary. Loans to students have grown by a healthy 20% in the last few years. State Bank of India has the largest share of education loans: Rs. 11,000 crore (Rs. 110 billion), or around 25% of the outstanding portfolio of the industry. Once the guidelines are finalized, IBA will notify the new norms. K.R. Kamath, Chairman & Managing Director of Punjab National Bank (PNB), said his bank has not seen any alarming rate of NPAs from its education loan portfolio. “Funding education should be a top priority of Indian banks as access to proper education is the only way for the middle class population to come up in society,” Kamath said.

Education loans contribute 1.5% of PNB’s total loan book of Rs. 2.21 trillion in December. Ashvini Patil, Senior Manager (Banking Division) at rating agency Credit Analysis and Research Ltd., said majority of the NPAs in education loans happen for loans below Rs. 400,000, where no collateral is required. “Some of the banks are facing problem of NPAs emanating from education loans as students fail to repay. This happens primarily in the less than Rs. 400,000 category, where no collateral is required,” Patil said. But since education loans do not form a huge portion of banks’ overall loan portfolio, as a percentage of total NPAs they don’t pose a major threat, he added.

Source: Mint, April 12, 2011