Monday, September 06, 2010

Banks may base education loans on placement track

Your education loan application has a better chance of getting a favourable response from banks if the institute you propose to study in has a good placement record. Faced with rising bad debts in their education loan portfolios that are not backed by collateral, banks are looking at the placement record of institutes to judge the repayment capacity of students seeking loans. "The college may enjoy the government recognition, but if placement record is poor, how do you expect a student to get a job and repay", said an official in the country's largest lender State Bank of India.

The government rules do not allow banks to demand collateral or security for education loans up to Rs. 400,000, a measure to ensure funds are easily available to needy students. This unsecured lending, according to bankers, has seen a sharp spurt in instances of non-payment. They want to now ring fence these loans through other qualitative measures. So far banks have sanctioned Rs. 34,192 crore (Rs. 341.92 billion) towards education loan.

Instead of sanctioning loans merely on the basis of the students educational track record and whether the course and the educational institute was approved by the government, banks are also looking at the minimum and maximum package offered to the students at the institute to assess repayment capacity, though the Indian Banking Association has not yet said anything on the issue. "Its up to the sanctioning officer to take additional measures if he's not convinced with the application. However, due care is taken not to unnecessary harass the student," said an Indian Bank official.

One major public sector lender is asking for life insurance cover from its student applicants. "The policy is assigned in the favour of the bank and works as a double check", said a senior official with Punjab National Bank. The insurance policy helps to keep a track of the student and if there is an unfortunate event it protects the banks investment. The annual premium is paid by the student himself, or by the co-applicants, but the premium is generally very low. "In case the loan turns bad, there is some limited amount which can be recovered by surrendering that policy", explained an official with Bank of Baroda.

Banks are also looking to restructure education loans that have gone sour. Indian Bank is exploring the option of giving one-year relaxation to students for repayment towards their loans. Generally banks give a payment moratorium period of six months from the time a student completes his course. Banks have found that most loans turned bad in cases where students are unable to find jobs.

Source: The Economic Times, September 6, 2010
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