Banks look forward good business in education loan

Geebee Education, the consultant had organized an education loan mela in Mumbai and was surprised to get calls from so many banks beyond their expectations. Earlier when they had contacted banks only eight of them had confirmed their participation, but 13 turned up which made it difficult for the organizers to arrange space for the extra ones.

However the public sector banks are the leaders in education loan business.

But in the mela only few prospective borrowers turned up. The organizers believe it is due to rain for low turn up, moreover this year there has been decline in the number of Indian student going abroad due to the global recession. Around 250-300 prospective students turned up at the mela, although organizers had expected at least 500 students.

In the loan mela there were many options available. According to one of the prospective borrower Shikha Mutreja looking for an education loan to fund a master’s program at the School of Oriental and African Studies in London, was surprised to find wide choice at the loan mela.

A senior State Bank of India (SBI) executive, who handles retail credit, pointed out, "There is no significant change in business volumes (for educational loans) this year. The domestic demand will get a fillip when the new IITs and IIMs go on stream."

Loan mela banks made a good business as educational institutions in some countries have simplified funding norms for students. In the wake of attacks on Indians very few students are interested to go to Australia, thus colleges and universities of UK and Canada have opened their doors for Indian students. Now the Canadian educational institutions are not looking at the bank balance of the student and his/her parents, but are welcoming 100 percent loans. Geebee Director Vinayak Kamat informed UK too is allowing 100 percent financing.

Even the banks have eased the norms for educational loan but students are not borrowing more than 85% of the cost if they are going abroad. Kamat informed for studying at local colleges the loan amount being borrowed is about 95% of the value of the loan. Regarding interest rates in case you take admission in an IIM banks will charge 11% a year, whereas for a second-rung B-school the interest rate will stand to 14%.

However some students have complained still many banks deny loans to fund education at lower-rung institutes in India. Bank chiefs giving clarification on their part say that the situation has improved immensely, partly because of the pressure put on by the Reserve Bank of India (RBI) and the government.

A branch manager with a medium-size public sector bank, pointed out, “Often branch-level staff are not inclined to drive this business since these are smaller in value. Instead, they prefer to deal with companies’ working capital requirements, which involve less time and effort. But we are trying to ensure a change in this attitude”.

As a matter of fact banks have started realizing that recession or no recession, education loans are a low-risk business. For education loans above a certain value, public sector banks ask for a guarantor, other than student’s immediate family member. Even for the loans above Rs 12-15 lakh, collateral is required. In case of private banks, such as HDFC Bank, the student is the first applicant, while his/her parents are the co-applicant. “Even if the student is unable to pay, our repayments are not affected,” stated a bank executive at the loan mela.

Bank executives, informed in spite of the recession, in most cases students have repaid their loans that too ahead of schedule, typically in two-three years. According to Union Bank of India Chairman and Managing Director M V Nair, “Competition has increased as banks have realized that this is a good business since the risk of default on such loans is minimal. Our educational loan book has grown annually by 40-45 per cent for the last four years”.

SBI executive informed, “While giving a loan to a student, our intent is not just to get immediate business. We look at them as clients for the long term, be it overseas or in India”, while SBI has reported a 50 per cent jump in its education loan portfolio of about Rs 6,600 crore by the end of March 2009.

Seeing an opportunity, two years ago few of private sector lenders have also jumped into the business, while foreign players, such as Citi, are concentrating on big-ticket loans. Currently the public sector lenders are more active. Their outstanding portfolio of educational loans has registered a rise by 39.51 per cent to Rs 27,645.58 crore as on March 2009 as against Rs 19,816.54 crore a year ago. Even there has been increase of 28.59 per cent to 1.6 million in FY09 in the number of students availing loans as against 1.25 million a year ago.

Most of the Indian students prefer US, Australia, the UK, Canada and New Zealand and 90 per cent of them apply for an education loan. According to consultants the education scenario is quite different in the US this season as the recession had a great impact on the job scenario and any improvement is expected only in 2011. Thus education consultants are of view that parents should put off their loan plans for few months.

One of the students Ravina Nair, who is looking to pursue a three-year hotel management course in the UK said, “By the time I complete my education, things would have changed. Besides, it depends on the student”. “I have spoken to my friends in the UK. Not only have they found jobs, but they are also looking to pre-pay their loans,” added Suhail Kazi. Besides, a Canara Bank executive informed that banks, especially public lenders, are giving relaxation and restructuring loans.

He stated, “While it is up to the branch manager to decide, we are giving more time to those who have not found jobs and are, therefore, finding it difficult to repay”. “It (the recession) could work in two ways. Some may think to study for two years and by the time they complete their courses, the economic environment could improve. And, some others may postpone their plans for overseas education as a cautious response to the uncertain economic climate,” stated Union Bank’s Nair.