Education loan for MBA: Need an education loan? Banks may shut door on you

Published on November 27 2015

Avanse Education loans aims at providing financial support to deserving / meritorious students for pursuing higher education in India and abroad.

Securing an education loan for the upcoming academic session is set to be a difficult task, with several banks not keen on lending to students owing to a large number of defaults. The default rate, credit experts said, is high – 5% to 10% – in the education loan segment as against home and car loans (1.5%).

As a result, the growth rate of education loans has been steadily declining. Data from the Reserve Bank of India (RBI) revealed that in 2014-15, the segment grew just 5.7% year-on-year compared to 9.2% in 2013-14, 10% in 2012-13 and 10.36% in 2011-12.

“Asset quality is a big concern for banks as the job market is not robust or is not paying enough for borrowers to pay off loans,” said Anuradha Rao, who heads personal banking at State Bank of India (SBI), the country’s largest public sector lender.

Adding to the reluctance of banks to disburse education loans, the IBA has listed only 1,100 accredited institutions.

Ramesh is not an isolated case. A large number of students are often in a fix when it comes to repaying their education loans. The repayment process usually starts after the ‘moratorium period’, which is either a year after the end of the course or six months after getting a job, whichever is earlier.

The percentage of students taking a loan and the amount varies based on institutes and streams. According to experts, getting loans is more difficult for students who are not applying to top institutions or those who want to pursue off-beat courses. At premier institutions, such as the Indian Institutes of Technology (IIT) and Indian Institutes of Management (IIM), 30% students from a batch usually apply for loans. Students pursuing engineering typically apply for loans in the range of Rs. 7 lakh to Rs. 10 lakh, while those studying management tend to borrow between Rs. 10 lakh and Rs. 40 lakh.

While some top institutes such as IIM-B have started their own financial aid departments, where help, apart from scholarship from the government, is provided to students, others have tied up with various public sector banks to offer loans. Central Bank of India, for instance, provides a loan of up to Rs. 20 lakh with no collateral for students of IIMs. SBI also has special education loans for students securing admission to IITs, IIMs, NITs, AIIMS and other reputed institutions.

Also, a recent proposal by the central government is likely to encourage banks to disburse more education loans without worrying about defaults. The government is looking to create a Rs. 1,000-crore credit guarantee fund for education loans that banks can draw upon in case of defaults. It aims to guarantee a cover of up to 75% of the loan amount.

Bankers, however, are not entirely convinced. “While education sector needs such financial assurances, which will also benefit meritorious students, the risk factor for banks has not been taken into consideration entirely,” said a Canara Bank official, who did not wish to be named.

Credit Score Scare

The Credit Information Bureau (India) Limited (CIBIL) had recently announced that non-repayment of education loans will affect one’s credit score. A credit score reflects the financial health of an individual and is an important parameter for obtaining Education loan for MBA in the future.

Source: (https://educationloansinindia.wordpress.com/2015/11/27/education-loan-for-mba-need-an-education-loan-banks-may-shut-door-on-you/)