Despite the latest Marginal Cost of Lending Regulations (MCLR), home loan customers are struggling to get the benefit of interest rate reductions. And, if this is the situation in a regulated and intensively-competitive market like home loans, imagine the plight of other borrowers.
Take the example of the education loan market, which is completely lender dominated. Education loans are, typically, used to create or enhance earning capability of an individual. There can be loan repayment delays in several situations, for instance, if the student is unable to get a job after the course, or decides to stay back abroad, or study further. The major players in this market are public sector banks (PSBs), as they are forced by the government to provide these loans. Given that there is institutional refinancing or guarantee available, lenders tend to ration these loans to only borrowers with a good collateral and existing income.
Due to the rationing, a market has opened up for specialised companies such as Credila (a subsidiary of HDFC) and Avanse (a subsidiary of Dewan Housing Finance) and a couple of others. These specialised players are able to provide large unsecured education loans for courses (both locally and overseas) that have been assessed by them. The repayment requirements are minimal during the course period and the bulk is done from future earnings. But, all this comes at a cost. In the absence of specific regulations, they are covered by the normal regulations governing non-banking financial companies (NBFCs).
Recently, a friend contacted me seeking assistance for an education loan for his son who is pursuing an MS course at a reputed university in the US. The loan amount of Rs 25 lakh is spread over two years without any collateral security.
PSBs were out due to the absence of collateral security. The family eventually settled for a specialised company at an interest rate of 12.60 per cent. Though the loan needed to be spread over two years, the lender insisted on disbursing the entire loan immediately and kept it as a fixed deposit (FD) with its parent bank with a lien marked in favour of the lender.
It was explained to my friend that the actual bank FD in his name would help in obtaining a US Visa as compared to a plain sanction letter. Even though the entire amount was not needed immediately, he agreed without fully understanding the implications. It was only recently he realised that he was getting 6.25 per cent interest on the bank FD while paying 12.60 per cent on the disbursed amount. This was a high price to pay for a supposedly easy route to an US Visa. He asked the lender to redeem the bank FD and stop the interest meter on the education loan.
Despite promises, the lender has still not redeemed the bank FD. There are a lot of other charges such as insurance and forex rates where he may have ended up paying much more than the market rates. The borrower, here, has very little choice and has to accept conditions imposed by the lender. Specialised regulations are needed to ensure the healthy growth of this sector.
The author is a Sebi-registered investment advisor