Report Card

Written by Saikat Neogi | Updated: Jun 26 2012, 06:26am hrs
Banks will soon put in place a system of rating educational institutions based on their placement records to structure their education loan products better. A good placement history with higher salary offers, especially to poor students, would make bank loans less risky and enable lenders to lower interest rates and offer better security terms.

The Indian Banks Association (IBA), in its revised model educational loan scheme for pursuing higher education in India and abroad, has proposed rating of education institutions. The model will be developed by International Management Institute director Pritam Singh.

The IBA can refine the assessment process by combining college rating with the rank obtained by the student in the qualifying examination. Banks can also rate students every year during the period of the course and fix interest rates linked to the ratings.

Students getting admission to highly rated institutions, and with high ratings themselves, could be offered loans with lower rate of interest, says the revised guidance note. It suggests that besides weightage to institutes' rankings and the merit of students, ranking of courses offered by the educational institution be done on the basis of placements record of the institution.

The response of educational institutions to the concept was mixed at a recent meeting with the IBA. While some reputed institutions welcomed the suggestions, may others did not want college rating to be taken up by the banks or other external agencies as they claimed that most ratings were paid for by the institutions.

The IBA also hinted at bringing in new guidelines on differential interest. Currently, banks charge a fixed interest rate for all educational loans irrespective of the courses pursued, rating of institutions or the students. The association has decided to bring greater flexibility to the loan scheme by incorporating certain changes like differential security norms based on rating of courses/students.

Educational institutions have expressed their desire to associate with banks to help them track the progress of students in the college and their career progress thereafter. Currently, there is hardly any interaction between banks and educational institutions other than exchange of communication for sanction/release of the loan.

The IBA suggested flexibility in repayment of the loan as well. It says the system of uniform EMIs throughout the loan recovery period was not always appropriate as some student borrowers may not get placement with emoluments comparable with others in the batch. The association suggests that flexibility may be brought into the scheme by fixing progressively stepped-up instalments starting with a relatively smaller amount in the beginning.

Banks will charge relatively lower rates for loans up to R4 lakh and continue the concessions given to girl students. The 1% interest concession for servicing of interest during during moratorium period will continue. For availing loans below R4 lakh, an applicant does not have to give any collateral, a third-party guarantor or security amount. The guarantor of the loan could be the applicant's parent, working sibling, or even spouse, and in-laws or other close relatives.

All banks charge a processing fee, which can vary between 0.5 % and 2.5 % of the total loan amount. The maximum loan amount for studies in India is R10 lakh and R20 lakh for studying abroad. Some banks offer discounts on the interest rate for girl students.

One can claim income-tax deductions for interest paid on an education loan under Section 80E of the Income Tax Act. However, there is no benefit available on the repayment of principal amount of the loan.

Unlike home, auto or personal loans, those availing education loans do not have to start immediate repayments and can begin doing so after completing their course and securing a source of income. The moratorium period of the loan is the course period plus one year or six months after getting a job, whichever is earlier. Banks usually keep a window of 5-7 years for loan repayment and can give an extension of another two years if the borrower has a good repayment history. No prepayment charges are levied.

For students seeking admission under the management quota, banks will fix appropriate terms and conditions for the loans as they are outside the model scheme. Management quotas are seats in private educational institutions for which the management has the discretion to give admission on factors other than merit.

Apart from proof of identity, age and address, the student will have to furnish the admission letter of the institution and the fee structure of the particular course for each semester or annual charges. If the student is going abroad for the course for which he is seeking the loan, then he will have to give the passport details, GMAT or GRE score, total expenses for the course and all other travel documents to the bank.

The 'know your customer' compliance has to be complied with by the branch nearest to the place of residence of the parents. And after the loan is sanctioned, the student's file will be transferred to the bank branch closest to the institution for follow up.