Banks, especially those in the public sector, supporting the higher education dreams of Indians, both within and outside the country, is no longer news.
However, their recent decision to give loans to power the dreams of Non-Resident Indians (NRIs) and Persons of Indian Origin (PIO)/ Overseas Citizens in India (OCI) keen on getting a degree from an Indian institute of higher learning, is news for overseas Indians to sit up and take notice.
Banks will also consider education loan applications of students born abroad (have overseas citizenship by birth, when parents were on deputation with Foreign Government/ Government agencies or International/ Regional Agencies) and are now studying in India (after repatriation of their parents) for higher studies in the country.
Education loan to the aforementioned category of students will be subject to Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations, as per the Indian Banks’ Association’s ‘Model Educational Loan Scheme for Pursuing Higher Education in India and Abroad (2021)’. The earlier version of the ‘Model Educational Loan Scheme For Pursuing Higher Education in India and Abroad (2015)’ specifically stated that a student should be an Indian national to be eligible for an education loan.
Tweak in nationality criteria
The tweak in the nationality criteria in IBA’s Educational Loan Scheme ensures that it dovetails with the National Education Policy/NEP 2020 (released in July 2020). NEP envisages stepping up current public (Centre and States) expenditure on education in India from 4.43 per cent of GDP to 6 per cent and allowing select foreign universities – those from among the top 100 universities in the world – to operate in India.
According to banking expert V Viswanathan, the revamped loan scheme will be an incentive for meritorious students belonging to the NRI/PIO/OCI category to pursue studies in Indian institutions of international repute such as IITs/IIMs/IISc/XLRI.
“This will increase the number of students studying in Indian educational institutions of higher learning considerably. The number of foreign students studying in an educational institution is an important criteria in getting international ranking,” he said.
For NRI/ PIO/ OCI students, the new scheme requires the co-applicant to be a permanent resident of India. However, if the parents are also NRI / PIO/ OCI, banks may stipulate an additional co-applicant (who is a permanent resident of India). As per the scheme, normally, the student borrower may not have a credit history and as such he/she is assumed to be creditworthy. However, in case of an adverse credit history, banks, at their discretion, may frame suitable criteria based on their risk appetite.
Covers exchange programme
The scheme now also covers expenses towards exchange programme, whereby an Indian education institution sends its students to pursue education at a partner foreign university for six months to a year.
As for the documents required to take a student loan, the scheme makes it mandatory to submit passport in case of studies abroad. It says Aadhaar (unique identification) should be made mandatory, wherever applicable, as per the Supreme Court decision; and PAN Card is a mandatory document.
However, in case the student is not able to submit PAN details at the time of application, the same may be submitted subsequently as per the timeline decided by the respective banks (a minimum time of at least six months from the date of disbursal of the loan may be given).
Viswanathan observed that passport details can help banks in tracing an overseas student-borrower through the embassy/consulate in India in case he/she stops servicing the education loan.
Adequate financing
The scheme underscored that while assessing the quantum of finance, banks should ensure that a student is neither over-financed nor under-financed.
When it comes to the quantum of finance, the new scheme has not prescribed any cap. It only specifies that need-based finance should be provided to meet the expenses, taking in to account minimum margins.
The earlier scheme had capped the maximum finance for studies in India and abroad at up to a maximum of ₹10 lakh and ₹20 lakh, respectively. However, banks could consider higher quantum of loan on course to course basis (courses in IIMs, ISB).
Due to the rise in bad loans in the up to ₹4 lakh category, the new scheme has incorporated a clause, whereby parent(s)/ guardian(s) have to be joint borrower(s), along with a suitable third-party guarantee. The scheme says that it will also be open to banks to offer differential interest rates based on rating of courses/ institutions or even students.
The revamp of the model educational loan scheme also comes in the context of loans to this segment hitting the slow lane and non-performing assets hovering at over 5 per cent.
The educational loan portfolio of public sector banks (PSBs) rose by 9.1 per cent year-on-year (y-o-y) to ₹65,335 crore as on March-end 2016.
However, the growth slowed to 2.9 per cent y-o-y as on March-end 2020 (to ₹72,891 crore) and further to 1.5 per cent y-o-y as on December-end 2020 (to ₹73,977 crore), as per RBI data.
While the new scheme is a welcome development, there are rising concerns on possible defaults in education loans amid the Covid-19 pandemic, which has laid the economy low since March 2020.
Now, if student borrowers, who completed the final year of their course in 2020, did not get a job during the pandemic period, banks’ exposure to them could turn sour. The one-year repayment holiday/ moratorium after completion of course for these borrowers would either have been over by now or nearing completion.
So, the government, the Reserve Bank of India, and banks may have to consider an extended repayment holiday to alleviate the student-borrowers’ loan repayment woes as the pandemic has reared its ugly head again in the form of a second wave, and companies weigh their hiring plans from the point of view of demand for goods and services and the need to contain costs.