Until just a few years ago, higher education at prestigious schools was the preserve of the elite. The middle class dream of enrolling in esteemed institutes, or going abroad for higher studies, remained just so, a dream. Financial constraints robbed even the most competent students of their academic destiny.

 But not anymore. A number of banks are further opening up the domain of education loans, making more credit available to willing students. Not that this implies that credit flows readily to one and all. "It is a rationed product," says Harsh Roongta, CEO of Apnaloan.com. Loan applications are subjected to severe scrutiny, ranging from the institute's credibility to the student's loan repayment capacity. Moreover, loan sanctions are based solely on the banks' discretion.

  One reason for this is that education loans are not a very profitable venture for banks, as the Reserve Bank of India has mandated that banks keep interest rates on these loans low. Public sector banks are more active in lending, but private banks and institutions are also steadily diversifying into this field. "An education loan portfolio offers a good opportunity for any loan organisation," says Prashant A Bhonsle, Country Head, Credila Financial Services. "Education loan penetration is very low in India," he adds.

  The queue for education loans is increasing not only because students' ambition for growth is strong, but also because education is getting expensive. Various private professional schools, as well as IIMs, resorted to steep fee hikes this year. IIM-A recently increased the fee for its one-year post graduate programme in public management and policy to a staggering Rs 20 lakh from the previous Rs 12 lakh.

 

 Parallely, the education loan portfolio of lending institutions is gradually increasing. Indian Overseas Bank (IOB) witnessed a growth rate of around 33% for two consecutive years in the domestic segment. Last year the bank disbursed 2,482 education loans, amounting to a little over Rs 300 crore. Bangalore-based Corporation Bank saw a growth of 45% in their portfolio during 2008-09. "The bank disbursed Rs 268 crore during 2008-09," says JM Garg, Chairman and Managing Director. In the overseas studies segment, IOB disbursed Rs 211 crore, accounting to nearly 20% growth. "We are expecting a growth of another Rs 100 crore this year," says T Thenappan, general manager. But despite this growth, study loans still form a small part of these banks' entire loan portfolio.

Banks will ask for account statements of the last six months, proof of income, a brief statement of assets and liabilities of the co-borrower. "We look at the recognition and reputation of the institutions," says Seetharam Shetty, Deputy General Manager, credit-retail and priority, Vijaya Bank. The entire process takes anywhere between two to 12 weeks. Almost all banks approve loans for all the courses that have high employment prospects. These include graduation, post graduation and professional courses, besides courses approved by University Grants Commission (UGC), government, All India Council of Technical Education (AICTE) and Indian Council of Medical Research (ICMR). Loan sanctions for courses like engineering or medicine are easier to obtain because of the higher employability factor. Ashwin Kumar, 18, who enrolled in the BE (Mechanical) course at SCSVMW University, Kanchipuram got his loan within 15 days of submitting an application.

 Loan limitation
 Banks lend up to Rs 10 lakh for education in India and Rs 20 lakh for overseas study. Interest rates vary from bank to bank, which could be anywhere between 10 to 15.75%, depending on the loan amount. Most banks give girl students a concession of 0.5%. The interest rates can be fixed or variable. Under the variable option, the rates keep changing half-yearly or yearly. Some banks, like SBI, will give you a choice between fixed and floating interest rates. Most PSU banks don't charge a processing fee, unlike private banks, but watch out for the deposit that you will have to pay. For instance, SBI doesn't charge any processing fee but takes a deposit of Rs 5,000 for studies abroad, though this amount does get adjusted in the margin money at a later stage. Most banks provide loans only between 75 to 90%, depending on the total cost of the course. The rest of the cost that you fund from your own pocket is the margin money. When Vinita Sudhir took a Rs 2.25 lakh loan from Indian Bank in 2001 to finance her Bachelors in Mass Communication course, she paid 15% margin money. Ashwin took Rs 4 lakh credit from SBI, paying only 5% for his engineering course. The expenses covered in the bank loan include fees payable to the institute and hostel expenses, beside other costs (See table: Creditable Education). "The loan is released in stages as per the requirement, directly to the institute," says V Kumar, Ashwin's father and co-borrower.

  Collateral Call
 Loans of up to Rs 4 lakh do not require any collateral, whereas credit lent between Rs 4 lakh and Rs 7.5 lakh require security in the form of a third-party guarantor. Any sanction above Rs 7.5 lakh needs to be backed by tangible collateral security like government securities, property, gold, shares or a third-party with assets matching the loan amount. Vinita and Ashwin's parents, who were co-borrowers, with loan obligations of Rs 2.25 lakh and 4 lakh respectively, had to disclose details of their immovable property during the application. "We had to provide the house papers as security," says 25-year-old Vinita. Nitin Aggarwal, 25, who is presently pursuing an MBA at Moore School of Business, University of South Carolina, provided property papers and his father's provident fund as collateral for a Rs 16 lakh loan obligation.

Banks may ask for an insurance policy to extend and/or grant the education loan. They may also ask the student to offer an existing policy as collateral, or to buy a policy if the student does not already have one. "Banks will ask for collateral security such as property or insurance policies with high surrender value in case the loan is above Rs 4 lakh," says Roongta. Credila, a private lending institute, offers 100% credit, accepting non-agriculture properties as collateral, along with life insurance policies, fixed deposits and national saving certificates.

 Repayment Reprieve
Repayment of a loan starts one year after completion of the course, or six months after employment begins, whichever is earlier. The repayment period is usually 5-7 years. Vinita finished her course in 2004 and got a job soon after. "I am paying Rs 6,000 per month as EMI for a loan tenure of 5 years. My loan obligation gets over in 2009," she says. Some banks allow a moratorium on payment of interest, but under this option, the interest is compounded quarterly and added to the principal sum for repayment. Banks offer lower interest rates if you start repayment during the moratorium period. The education loan segment falls under priority lending for banks.

A loan pre-payment doesn't attract penalty. You can transfer your loan from one bank to another if you find a more attractive offer. Normally, 1% of the outstanding loan amount is charged to the borrower if he switches from one bank to the other. If you are unable to complete the course, you will have to start paying the EMIs immediately. How big an EMI obligation should you take on? What should your salary be for EMI outflows to be a breeze and not a burden? According to financial experts, your debt should not be beyond 50% of your monthly income (See table:  Loan Vs EMI).

Default rates
The gloomy job market has derailed the plans of well-intentioned borrowers who have not been able to keep up with installment payments. But that section of borrowers is still a minority. As per the banks, the default situation hasn't reached alarming levels. "Defaults have not been that many during the last financial year," says Seetharam Shetty of Vijaya Bank. Banks are not generously exposed to this segment, as yet. "The education loan outstanding of our bank is around Rs 1,033 crore, which accounts for 1.36% of the entire portfolio of loans, which is Rs 7,57,65 crore," says T Thenappan of  IOB. The panic button is likely to be pressed only after three to four years, feels Roongta. The study loan scheme as per government guidelines came into force only in the year 2001. The loan repayment starts from the year 2008 onwards. But as a righteous borrower, if the default is giving you sleepless nights, you can ask the bank to re-structure the loan. "Banks are willing to consider it on sympathetic grounds," says Roongta. "We are analysing the reasons for default and if the cases are genuine, repayment programmes are being re-scheduled," says Thenappan.