Studying abroad may get cheaper

Getting a loan to pursue study abroad may just get easier following the Reserve Bank of India's (RBI's) decision to reduce risk weightage on educational loans to 75 per cent from 125 per cent.

This will increase the funds available with banks for lending. However, the move is unlikely to lead to any immediate reduction in interest rates.

"The RBI's decision to reduce risk weightage on education loans will increase the quantum of lending for the purpose of education. This will not translate to any reduction in rates as the capital release on account of the reduction in risk weight will be minimal. However, we will now be able to lend more. The non-performing loans in this portfolio are low as banks now ask parents to guarantee the loan availed," said MV Nair, chairman and managing director, Union Bank of India.

Currently, interest rates on educational loans hover in the range of 11 to 11.50 per cent. On an average, banks lend a maximum of Rs 7.5 lakh for studies in India and a maximum of Rs 15 lakh for studies abroad. The interest rate on loans up to Rs 4 lakh is pegged to the bank's benchmark prime lending rate (BPLR).

Loans in excess of Rs 4 lakh are priced one percentage point over the BPLR. "This change comes with the government's thrust on educational loans. The change in risk weight will not lead to immediate change in interest rates," said TS Narayanasami, chairman and managing director, Bank of India.

The reduction in risk weight, coupled with priority sector lending status to education loans, should give an impetus to growth in the dispersion of education loans.

Loans granted to individuals for educational purposes up to Rs 10 lakh for studies in India and Rs 20 lakh for studies abroad qualify as priority sector lending. Banks granted educational loans to the tune of Rs 16,926 crore as on August 17, 2007, say RBI data.

V Santhanaraman, executive director, Bank of Baroda, said: "With the cut in risk weightage, banks will be able to give more educational loans. However, it does not mean that banks will reduce the rate of interest on educational loans immediately."