PICTURE SPEAK

BANKING ON THE FUTURE: At the ICICI Bank counter on the ISB campus

Three years ago when Amit Shah got into NMIMS, the Mumbai-based business school of his dreams, he was over the moon. But his father, a Vadodara-based businessman, barely had time to celebrate. Instead he pulled out all his financial records and got on the hotline to his family accountant. The reason: dishing out over Rs 1 lakh in the first year alone, not including living expenses, was a steep demand. Finally Shah decided to resolve the dilemma by taking an education loan. After weeks of scouting around for a good deal followed by rounds of negotiation, all he landed was a loan of Rs 2 lakh at an interest rate of 12 per cent.

This year, when Manmeet Singh was accepted at the Oregon State University, USA, she made a beeline for the Oriental Bank of Commerce (OBC) for a student loan. "I took the loan strictly because the visa process required it. While the process was easier for me because the bank manager was a personal friend, it still took 10-15 trips to the bank, a tonne of documents in tow," she says. On the other hand, Siddharth Sethi, who will be a part of the student fraternity of Boston College, USA, come Spring 2006, has no plans of even looking at student loans available in India. As he puts it, "The maximum financing I can get under education loan here is Rs 15 lakh, or Rs 20 lakh from a precious few banks. That is about 40 per cent of what I will need for my course." Since many financial and banking institutions in America offer better terms, Sethi intends to ask his Green Card-holding uncle to stand in as a guarantor.

Somewhere between the experiences of Shah, Singh and Sethi lies the story of student financing in India. At the turn of the millennium, the RBI passed a ruling that no deserving student should miss out on a higher education because of paucity of funds and thus the education loan was born. Five years on, it is mainly the public-sector banks that are offering the facility. The big-banner private banks such as ICICI Bank, Citibank, HSBC and others joined the bandwagon much later and most admit that its not a "priority sector" or a "major portfolio" for them.

However, the aim is not to denounce education loans. While there is no nation-wide collective data available, the following statistics hammer home the immense appeal of such loans. In 2004, a total of 1.4 lakh such loans were disbursed across the country. For a more current perspective, sample this: Allahabad Bank has sanctioned 750 education loans which translates into Rs 16-17 crore in the just first quarter of 2005-2006. According to a deputy general manager with the bank, "Of the total number of loans we have sanctioned, about 60-70 per cent are for b-school students."

Then, the State Bank of India's (SBI) Scholar Loans, which is directed at students of the top management schools, engineering and medical colleges in India, has had 350 takers so far in the Delhi region alone. Given that there are at least 35 commercial banks pushing education loans, the business is more than booming. Says Deepak Lingwal, a personal banking manager with SBI, "We cater to about two-thirds of students in India's top B-schools."

ABC OF EDUCATION LOANS

How does it work? Consider a student loan of Rs 7 lakh for a two-year MBA degree at 9 per cent interest rate. The repayment of the loan, or the EMI, will begin only two-and-a-half years after the loan was first disbursed. Called interest servicing, many banks demand the interest for the period-Rs 1.57 lakh in this case-to be paid during the course itself. Some banks reward prompt payment with a lower interest rate at the end of the tenure. The EMIs are to be repaid after a moratorium period, usually one year after the completion of course or six months after picking up a job whichever comes first. In this case the EMI will be Rs 2,076 per lakh over five years or Rs 1,609 for seven years. Why it makes financial sense? So far, under Section 80E of the Income Tax Act, students were allowed deductions up to Rs 40,000 from their total annual income towards servicing the principal and interest amounts of the education loan for up to seven years. But there is uncertainty about the impact of Budget 2005 on this. ALLAHABAD BANK LOAN AMOUNT In India: up to Rs 7.5 lakh Overseas: up to Rs 15 lakh RATE OF INTEREST Between 8.5% and 10 % AMOUNT TO BE PAID BY LOAN TAKER For loans up to Rs 4 lakh: 5 % For loans above Rs 4 lakh: 15% COLLATERAL Nil for up to Rs 4 lakh. Third party guarantee for Rs 4-7.5 lakh. Collateral security for loans above Rs 7.5 lakh. BANK OF BARODA LOAN AMOUNT In India: up to Rs 7.5 lakh (Rs 8 lakh for MBA) Overseas: up to Rs 15 lakh RATE OF INTEREST Between 9.5% and 11.5% AMOUNT TO BE PAID BY LOAN TAKER For loans up to Rs 4 lakh: 5 % For loans above Rs 4 lakh: 15% COLLATERAL Nil for up to Rs 4 lakh. Third party guarantee and collateral for bigger loans. STATE BANK OF INDIA LOAN AMOUNT In India: up to Rs 10 lakh Overseas: up to Rs 20 lakh RATE OF INTEREST Between 8.75% and 11% AMOUNT TO BE PAID BY LOAN TAKER For loans up to Rs 4 lakh: 5 % For loans above Rs 4 lakh: 15% COLLATERAL Nil for up to Rs 4 lakh. Third party guarantee for Rs 4-7.5 lakh. Collateral security for loans above Rs 7.5 lakh. HDFC BANK LOAN AMOUNT Up to Rs 2 lakh RATE OF INTEREST Between 12% and 13% AMOUNT TO BE PAID BY LOAN TAKER For loans up to Rs 4 lakh: 5 % For loans above Rs 4 lakh: 15% COLLATERAL The earning parent or guardian has to be the co-applicant to the loan and the bank requires personal guarantees and such other security. SYNDICATE BANK LOAN AMOUNT In India: up to Rs 7.5 lakh Overseas: up to Rs 15 lakh RATE OF INTEREST Between 9.5% and 10% AMOUNT TO BE PAID BY LOAN TAKER For loans up to Rs 4 lakh: 5 % For loans above Rs 4 lakh: 15% COLLATERAL Nil for up to Rs 4 lakh. Third party guarantee for Rs 4-7.5 lakh. Collateral security for loans above Rs 7.5 lakh. ANDHRA BANK LOAN AMOUNT In India: up to Rs 7.5 lakh Overseas: up to Rs 15 lakh RATE OF INTEREST Between 12% and 13% AMOUNT TO BE PAID BY LOAN TAKER For loans up to Rs 4 lakh: 5 % For loans above Rs 4 lakh: 15% COLLATERAL Nil for up to Rs 4 lakh. Third party guarantee and collateral for loans above Rs 4 lakh. This is an illustrative list. A few other banks also offer education loans.

For the uninitiated, here is the nitty-gritty of an education loan as available in India currently. The Comprehensive Educational Loan Scheme framed by the RBI envisages loans up to Rs 7.5 lakh for studies in India and up to Rs 15 lakh, sometimes Rs 20 lakh, for studies abroad. For loans up to Rs 4 lakh, no collateral or margin is required and the interest rate does not exceed the Prime Lending Rates, which is 11 per cent. For loans above Rs 4 lakh, banks demand a third party guarantor while those above Rs 7.5 lakh need some collateral and the interest rates are higher.

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