Public sector lenders lead the pack in this low-risk business.
When Shikha Mutreja went to a loan mela looking for an education loan to fund a master’s programme at the School of Oriental and African Studies in London, little did she know that she would have so much choice.
Even Geebee Education, the consultant that had organised the mela, did not expect so many banks to come calling. Instead of eight banks that had confirmed participation, 13 turned up, leaving the organiser with the task of finding space for the extra few.
In contrast, there were fewer prospective borrowers at the mela. While the organisers blamed it on the rain in Mumbai, there is no denying the fact that there has been a moderation in the number of Indian students going abroad this year due to the global recession. So, only 250-300 students turned up at the mela, whereas the organisers had expected at least 500.
A senior State Bank of India (SBI) executive, who handles retail credit, said: "There is no significant change in business volumes (for educational loans) this year. The domestic demand will get a fillip when the new IITs and IIMs go on stream."
However, banks made a beeline for the mela primarily because of the fact that educational institutions in some countries had eased funding norms for students. With very few students opting to go to Australia in the wake of attacks on Indians, colleges and universities in the UK and Canada have rolled out red carpets for Indian students. So, instead of looking at the bank balance of the student and his/her parents, Canadian educational institutions are now welcoming 100 per cent loans. The UK too has allowed 100 per cent financing, according to Geebee Director Vinayak Kamat.
But despite easier norms, students don’t want to borrow more than 85 per cent of the cost in case they are going abroad. For studying at local colleges, the loan amount can be 95 per cent of the value of the loan, says Kamat. As for interest rates, if you get into an IIM, banks would charge 11 per cent a year, while for a second-rung B-school, the interest rate would be around 14 per cent.
On availability of loan, students complain that many banks are still denying loans to fund education at lower-rung institutes in India. However, bank chiefs stress that the situation has improved tremendously, partly due to the pressure from the Reserve Bank of India (RBI) and the government.
“Often branch-level staff are not inclined to drive this business since these are smaller in value. Instead, they prefer to deal with companies’ working capital requirements, which involve less time and effort. But we are trying to ensure a change in this attitude,” says a branch manager with a medium-size public sector bank.
Banks have come to realise that recession or no recession, education loans are a low-risk business. In case of education loans above a certain value, public sector banks seek a guarantor, who cannot be from the student’s immediate family. For loans above Rs 12-15 lakh, there is also the need to provide collaterals. For private banks, such as HDFC Bank, the student is the first applicant, while his/her parents are the co-applicant. “Even if the student is unable to pay, our repayments are not affected,” says a bank executive at the loan mela.
According to bank executives, despite the recession, students have repaid their loans in most cases ahead of schedule, typically in two-three years. “Competition has increased as banks have realised that this is a good business since the risk of default on such loans is minimal. Our educational loan book has grown annually by 40-45 per cent for the last four years,” says Union Bank of India Chairman and Managing Director M V Nair.
“While giving a loan to a student, our intent is not just to get immediate business. We look at them as clients for the long term, be it overseas or in India,” adds an executive of SBI, which saw a 50 per cent jump in its education loan portfolio at around Rs 6,600 crore at the end of March 2009.
Sensing an opportunity, private sector lenders also jumped into the business around two years ago, while foreign players, such as Citi, are focusing on big-ticket loans. However, it is the public sector players that are more active. Their outstanding portfolio of educational loans have risen by 39.51 per cent to Rs 27,645.58 crore as on March 2009 from Rs 19,816.54 crore a year ago. And, the number of students who availed themselves of loans has gone up by 28.59 per cent to 1.6 million in FY09 from 1.25 million a year ago.
For Indian students, the US, Australia, the UK, Canada and New Zealand are the main destinations and 90 per cent of them opt for an education loan. Consultants say that the education scenario in the US is different this season as the recession has affected the job scenario and any improvement is seen only in 2011. Therefore, education consultants are advising parents to defer their loan plans by a few months.
“By the time I complete my education, things would have changed. Besides, it depends on the student,” says Ravina Nair, who is looking to pursue a three-year hotel management course in the UK. “I have spoken to my friends in the UK. Not only have they found jobs, but they are also looking to pre-pay their loans,” adds Suhail Kazi. In addition, a Canara Bank executive says that banks, especially public lenders, are taking a lenient view and restructuring loans.
“While it is up to the branch manager to decide, we are giving more time to those who have not found jobs and are, therefore, finding it difficult to repay,” he informs.
“It (the recession) could work in two ways. Some may think to study for two years and by the time they complete their courses, the economic environment could improve. And, some others may postpone their plans for overseas education as a cautious response to the uncertain economic climate,” says Union Bank’s Nair.