New Delhi, 2009: Public sector banks say the Indian demand foroverseas education seems tohave withstood the global recession.Banks expect to see requests for overseas education loans piling up this year, but are stepping up due diligence, and taking more time in studying loan applications as concerns rise about defaults.

Repayment Concerns

Most Indian state-run banks have seen their loan portfolios grow. Corporation Bank for instance has an education loan portfolio of which about 27% are overseas loans. The bank is eying a 25% growth in overseas educational loans.

A senior banker at a state-run bank, however, points out that repaying capacity has become a prime concern, as the possibility of default is rising in the current economic environment. Students graduating from schools in America, Europe, and the West are finding it tougher to find jobs so banks are concerned about lending. “Public sector banks are pressured into providing subsidized credit, with the highest risk potential, for a socialist objective rather than a commercial reason. This pressure is only on public sector banks and not private sector banks,” points out a senior banker, who did not want to be named.

Low Interest Loans

By paying a little more, we can use a study loan to get a world-class education with better employment and migration prospects,” says Taluja, who hopes to complete get his degree and work in Australia.

State-run banks offer low-interest higher education loans for about 12%. The rates are lower than student loan offerings from commercial banks that charge interest rates hovering around 14.75%. Public sector banks are also proscribed from refusing an education loan without offering adequate reasons. Repayment starts after the course finishes and the bank is bound to extend the moratorium, in case a student is unable to complete the course within the expected time.

It is estimated that education loans across public sector banks amount to more than 20,000 crore (USD 4,000 million) and account for nearly one fourth of all loan defaults. This has led to higher diligence.

Stringent Guidelines

“Faced with increasing loan defaults, we formed a working group committee, drawn from prominent public sector banks that have helped to make education loan guidelines more stringent,” said Prabhuta Vyas, Senior Vice President, Indian Banks Organization.

“To ensure timely repayment, banks now include the parents as the co-borrowers with an equal responsibility towards repayment,” she added.

Banks also encourage parents and guardians to start payments immediately to avail of an interest rate discount on the loan. While handing out loans banks evaluate merit, income prospects from a chosen study course and the student’s capability to complete the course besides the reputation of the foreign university. The key criteria, however, for approving a loan depends heavily on the income documents which are scrutinized by banks.

Documentation

• Completed loan application form
• Examination mark sheets
• Proof of admission or a letter from the university
• Visa approval papers
• Travel documents
• GMAT/GRE/SAT scores
• Proof of scholarship if you have secured one
• Bank account statement for the previous six months
• Statement of assets and liabilities of the student or guardian who is the co-borrower
• Proof of parents’ income
• Income tax returns for two previous years
• Statement of course-related expenses
• Passport size photographs

Students in India say public sector banks move at a snail’s pace. “There are too many procedures. The bank is supposed to make a disbursement within 10 working days but in my case, it took more than one month since the time I applied for the loan,” said Saurabh Taluja, who is doing a Masters in Professional Accounting at the University of New South Wales, in Australia.

Banks claim they are trying to process loans faster and make the disbursement within seven working days. The due diligence and delays often force students to turn to private sector banks.

Despite all the diligence Indian state-run banks still get the short end of the stick. For instance, Ananya (name changed on request) who did a nine-month professional course in America received INR 5 lakh (USD 10,000) as a loan from a government bank. This wasn’t enough to cover her costs, so she took out a second USD 30,000 loan from Citibank in New York with the help of a relative, a US citizen, who stood guarantor. Ananya couldn’t find a job in recession-hit America so came back to a job in India. She started repaying the Citibank loan first as it had a higher interest rate.

Repayment becomes tough for students like Ananya who don’t get an opportunity to work abroad even for a few years after completing their studies.

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Lure of Studying Abroad

“India’s quota system hampers meritorious students from finding spots in colleges. Private institutions also charge capitation fees and huge tuition fees. By paying a little more, we can use a study loan to get a world-class education with better employment and migration prospects,” says Taluja, who hopes to complete get his degree and work in Australia.

According to industry experts, Indian students are more inclined to take education loans for studying abroad. “About 65% of all education loans in India are taken to finance a foreign education. Most students are eager to work and earn in the country where they have studied. But this is possible only if they can find a sponsor to convert student visas into work permits. Given the tight global economic situation, many are disappointed,” warns education consultant Vikram Shah, director of Pyramid Foreign Education.

Despite the slowdown in the global economy there has been no reduction in the number of education loans being forked over by state-run Indian banks. On the contrary, the number of loans spiked from 200,000 in 2005 to over 300,000 in 2008.

Expenses Covered Under Education Loan

• Course fees
• Examination fees, Library /Hostel and Laboratory fees
• Expenses on books, equipment, instruments, uniforms
• Purchase of computer
• Purchase of two-wheeler
• Refundable security deposits
• Travel expenses
• Expenses on study tours, project work or any expense that is essential to completion of the study program
• Insurance premium for the student borrower

Today, India is the leader in sending its students overseas for international education with over 123,000 students studying outside the country. Vigorous efforts have been undertaken by US and other foreign universities to persuade Indian students to study abroad. The availability of student loans and education fairs also make it easier for Indians to study abroad. Vinod Rawat said he sent his son Ankur to study medicine in Gong Zhu University in China after he faced difficulties in getting admission to a good medical college in India.

“We heard about the Chinese university through an education fair in Delhi and Ankur got through the admission process and arranged for an education loan. The cost of the education was higher than we anticipated, but we are happy. Ankur says the education infrastructure is good, the medium of instruction is English and most of the lecturers are Indians. What’s more, he is also learning Mandarin!” said Rawat, who is upbeat about his son finding work in India once he comes home with his degree from China.