Banks step up education loan

The 28 public sector banks saw a 40 per cent jump in the education loans extended till March this year. The state-run banks had outstanding education loans of Rs 19,817 crore at the end of March 2008 compared to Rs 14,214 crore at the end of March 2007.

Data for the large private banks is unavailable, but the smaller players are also focusing on young borrowers.

"High skills and qualifications will lead to an upward mobility in earnings. Hence, there is a market for value-added services such as wealth management, besides the normal banking activity," said the head of credit at a South-based private bank.

What also helped banks last year were the tax benefits provided by the government. Prior to the last financial year, only students who borrowed directly were eligible for tax deductions, while parents, who were the borrowers in most cases, were not entitled to any benefits. The government provided tax benefits to the parents last year by amending the Income Tax Act.

Banks will be able to get resources, extend loans, earn interest income and garner fees by providing advisory services. Karnataka Bank is using student loans to garner more business. The Mangalore-based bank is using this channel to attract deposits from students, relatives and friends.

Citi Union Bank chairman S Balasubramanian said, "The employment opportunities are good in a high economic growth environment. Students get jobs in the fourth year itself."

Students pursuing professional courses such as engineering and information technology receive job offers galore. The repayment record too is good. The bank only has to ensure that due diligence (Know Your Customer check) is sound. Lending at institutions helps banks to get background information about the borrowers.

Asked about the returns, Balasubramanian said that education loans are available between 10.5 and 11.5 per cent, which is below the prime lending rates. The returns are not negative, but bad.

Karnataka Bank chief executive officer K Ananthakrishnan said his bank has a scheme in place since 2001, but the lending activity has gathered pace only in 2005-06. Its outstanding education loans stood at Rs 57 crore by March 2008.