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Can you take education loan? Bankers don’t know

Friday, 2 November 2012 - 10:00am IST | Place: Mumbai | Agency: dna

The question of who is eligible to take an education loan has bankers in a bind.

The question of who is eligible to take an education loan has bankers in a bind.

The confusion began with Union finance minister P Chidambaram’s statement earlier this month that loans should also be extended to students taking admissions through management quota, irrespective of their academic background or achievement. Simply put, loans could be given to even non-meritorious students who may have fewer chances of employment.

Management quota students are typically charged higher fees compared with students who have got their seats on merit.

“Till now, banks were offering education loans on the basis of employability and earning potential of the borrower. But going forward, it will become mandatory for all banks to extend loans to non-meritorious students, too. No intimation has been made officially other than a statement by the finance minister,” said an official from a public sector bank.

Most bankers are unhappy with the proposed change in rules. According to them, loans sanctioned to such candidates are risky and could easily slip into the bad loan category if they are unable to repay.

“It will be difficult for non-meritorious, management-quota students to repay the loans as the possibility of them landing good jobs may be less. Also, there can be cases where a borrower doesn’t complete the course itself,” said Varghese KI, additional general manager, Federal Bank.

The only positives bankers see are the promised credit guarantee fund and interest rate subsidies on these loans.

The credit guarantee fund, through which the government will provide guarantee in case of a default by borrowers, may increase the confidence of banks to lend to this category of customers.

Under this arrangement, the government may pay 60-70% of the loan in case of a default. It may charge a certain guarantee fee every year, which banks are likely to pass on to the customers,  said an official from a public sector bank .

Chidambaram’s suggestion of granting education loans to non-meritorious students came after the Indian Banks’ Association (IBA) tweaked the loan norms in June. Under the revised IBA norms, banks can’t deny education loans to meritorious management quota students. They are to take into account the fees approved by the state government or an approved regulatory body for payment seats, subject to viability of repayment.

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