A long road ahead

Updated: Aug 3 2005, 05:30am hrs
June 13, 2005, was D-day for Sana Khan. She had topped the entrance exam of Symbiosis Institute of Mass Communication. Hailing from a middle-class family, she did not want to burden her parents with the hefty fee. So, despite the hurdles, she opted for an educational loan.

Higher education is not a difficult proposition any more. Study loans, still at a nascent stage, have seen a steady trend in India for the past two years. Some bankers estimate that so far, banks have extended Rs 6,130 crore worth study loans to 4.32 lakh students in India. This figure is set to rise, with some private and foreign banks foraying into this segment.

According to UTI Banks head of retail assets, Sujon Sinha: The emergence of aspiring middle-class segment has witnessed a change in terms of their lifestyle and debt-shy attitude. This has seen a drastic increase in the flow of applications. Further, mushrooming of various business schools has led to larger loan ticket sizes. In this higher end of educational loans, private and foreign banks are seen at par with the public sector banks.

However, most banks exposure towards education is still minimal, compared with other portfolios, like mortgage or auto. HSBCs head, personal financial services, India, Nicholas Winsor, says: The demand for study loans is seasonal. Mostly there is a greater demand for studies abroad. This is the primary reason why educational loans account for an extremely small proportion of a banks lending portfolio.

Many private and foreign banks are not proactive in this business. The private sector HDFC Bank does not offer education loans. ICICI Bank has one, but openly says: It is not really a priority area. Among foreign banks, only HSBC is into education loans in a big way. Besides extending financial assistance, the bank has scholarships for students aspiring to study in the United Kingdom.

But a number of Indian PSU banks have taken the education loan segment seriously, constituting 90% of the market share. Says Andhra banks general manager, Mumbai Zone, TRS Trivedi: Education loans require more administrative work. Typically, private and foreign banks shy away from any high administrative work for a small loan size. They like to participate in portfolios, which earn higher return on assets.

Private bankers counter this and say this segment is highly controlled and regulated as it comes under the direct purview of the finance ministry. Most of the policy decisions regarding study loans is taken by the finance ministry, in association with the human resource development ministry. To exemplify, for loans up to Rs 4 lakh, the banks should lend at their prime-lending rate. For loans exceeding Rs 4 lakh, the rates levied would be 1% higher than their PLR. However, there are some relaxations for the weaker sections of society.

Typically, private and foreign banks are not comfortable in foraying into highly regulated segments. Moreover, there are certain guidelines which prohibit rejection of study loan applications and go against the grain of the lending habits of private and foreign banks. Mr Sinha says: For institutes/universities on the outskirts of cities, PSBs are better equipped to service these applications.

Be it a public, private or a foreign bank, there is not much to differentiate between their loan products. These bank follow the Model Education Loan Scheme approved by the Reserve Bank of India. Most banks study the viability of the borrower based on personal discussions with the student, familys assets and annual income, the nature of the course and reputation of the institute.

Borrowers, who fear the burden of repayment, should know that the repayment of an education loan is deductible under Section 80E of the Income Tax Act. The yearly limit for deduction is Rs 40,000 (principal and interest). Only loans taken for higher education graduate or post-graduate, professional, and pure and applied sciencecan claim deduction. The deduction will be available for a maximum of eight years starting from the day of repayment.