Good marks, no collateral

A bankers’ committee suggests banks lend to meritorious students without collateral.

If you are planning to fund you education through a bank loan, you should just double your efforts. A committee set up by Indian Banks Association under TM Bhasin, CMD, Indian Bank, has reviewed the existing structure of the educational loan scheme, introduced 10 years ago by the then finance minister, Yashwant Sinha. The scheme has remain unchanged over the last six years, despite the rising education costs and expansion in the education loan market. The committee has made certain recommendations which will be sent to the Reserve Bank of India (RBI) and the Centre.

One of the important recommendations is that uncollateralised loans be given only to students getting admissions on the basis of merit. Banks can decide the cut off marks for lending without any security. Also, it will consider the employment potential and repayment capabilities. As of now, loans under Rs 4 lakh do not require any security.

The committee has also suggested increasing the repayment period by two-three years to ease the pressure of servicing the equated monthly installments. Currently, the period stands at 5-7 years. Usually, a student is granted a moratorium period of the course period plus one year, or the course period plus six months after getting a job, whichever is earlier.

Measures like a higher due diligence and subsequent follow ups have been recommended to ensure a decline in defaults. The levels of defaults from educational loans have gone up significantly for some banks. “The non-performing assets from the education loan portfolio have risen from 1.5 per cent last year to 3 per cent in 2010-11,” said a Bank of Baroda official.

For loans taken for studying abroad, some banks had raised issues about doing a follow-up with students. “We are considering seeking an endorsement on the student’s passport,” said a senior IBA official. However, a public sector bank executive said the concerns of default with students going abroad were less as most of them got admission after thorough screening. Also, these loans were backed by collaterals because of a bigger ticket size.