PROJECT REPORT ON

RISK ANALYSIS AND CREDIT RATING

OF
EDUCATION LOANS

BY

GROUP-3

SECTION- C2DE

MUKUL MATHUR 2009166

NIMIT SHARMA 2009169

PADMNABHAM S TIWARI 2009173

PARTH AGNIHOTRI 2009174

PRASHANT SHARMA 2009187

INSTITUTE OF MANAGEMENT TECHNOLOGY, NAGPUR

EDUCATION LOANS IN INDIA

As the educational expenses are going higher, education loans have become a most well-known
method of funding higher education. Education loan is becoming popular because of the rise in the fee
structure. This is due to the spreading of self-financing institutions in the field of engineering, medical
and management sides. These institutions have a very high fee structure, as they have less funding
from the government. So funding higher education in India now becomes a tough task. With a certain
limit this issue can be overcome by the help of education loans from various banks.

Both public sector and private sector banks offer education loans. It came in to existence in 1995 by
SBI bank and after that many banks started offering education loan. As this loan scheme is not a main
loan stream, people have no thorough idea about the terms and conditions.

For no doubt that education cost a great deal today. In today’s job trend, higher degrees offer better
job opportunities. Education loans can help students to pay for their educational needs, so as to get
jobs that are well paying and offer a bright future.

Common issues faced about Education Loans

Education Loan is a priority sector lending. Most of the banks have education loan programs.
However, the common issues faced by most students include:

 Which banks should I go to?

 Why do I have to go to the native bank branch?
 Why do I keep getting requests for more and more supporting documents?
 Why does it take such a long time to get the education loan approve?

Most students and parents want the education loan approval in time. If loan approvals don’t
come in time, students risk losing out on the admission in the college or if they are going
abroad, visa dates get missed.

Education segment is quite complicated. There are tens of thousands of colleges and courses.
It’s not easy for officers and managers to keep track of educational institutes. There are so
many colleges and courses getting added every year. It’s therefore, quite confusing for
officers to find out validity of courses, colleges and Universities.

Also, typically education loans are required for colleges which are in cities other than the
branch location. It’s therefore, seen as high risk by some officers.
However, some lenders are education loan specialists. Their understanding of the education
loan segment is quite high. They use their own databases and knowledge to offer much
quicker processing.

Should I take Education Loan?

It depends on your requirements. Typically speaking, there are a lot of hidden costs while
pursuing higher education e.g. fees for coaching classes, fees for additional entrance exams,
fees for some extra courses, additional living expenses like cell phone bills, internet charges,
trips to native city or native country, cost of books, laptop computers. In today’s
environments, most of colleges typically raise fees every year. In some colleges fees are
increasing quite dramatically.

Education Loan and Tax Advantage

There is a tax advantage to take loans. Interest repayments on education loans are tax
deductible. A deduction under section 80 E of the Income-Tax Act for the interest paid on an
educational loan can be claimed.

It’s therefore, quite prudent to take the approval of education loan and use it as and when
needed.

Processing Fee/Origination Fee for education loan

While processing your education loan form, the lender has to put in a lot of efforts, which
include some costs such as:

 Title Search Fees

 Document preparation fees
 Fees for lawyers
 Fees for CIBIL report
 Cost of employment verification
 Cost for general validation and verification
 Underwriting costs
Does your course qualify for a loan?

Banks typically have their own lists of courses, which are eligible for loans. These lists may
not be comprehensive for study abroad. Since there are thousands of new courses coming up
every year, it gets confusing for officers and managers.

It might be helpful to have an education loan option with a non bank education loan option if
you have some questions or are not sure about your course, while you work with banks.

Is guarantors or collateral required?

Almost every bank requires a cosigners/guarantor for every loan. Parents or relatives
typically act as cosigners or guarantors. A guarantor has the responsibility to repay the loan if
the student defaults on the loan repayment. Typically, banks look at the employment details
and financial details of the in relation to education loan amount.

The usual security that banks accept is Non Agriculture Land, House, Property, Fixed
Deposit Receipts, National Savings Certificates (NSCs), bonds, gold, etc.

What is a Credit Score?

Credit scores are calculated by using scoring models and mathematical tables that assign
points for different pieces of information which best predict future credit performance.
Developing these models involves studying how thousands, even millions, of people have
used credit. Score-model developers find predictive factors in the data that have proven to
indicate future credit performance. Models can be developed from different sources of data.
Credit-bureau models are developed from information in consumer credit bureau reports.

Credit scores analyze a borrower's credit history considering numerous factors such as:

 Late payments
 The amount of time credit has been established
 The amount of credit used versus the amount of credit available
 Length of time at present residence
 Employment history
 Negative credit information such as bankruptcies, charge-offs, collections, etc.
What is a Credit Score in relation to Education Loan?

Education Loan specialized lenders have a specialized credit scoring model that scores
students based on the University, College and the Course of admission. They also consider
academic background of student. It could be helpful for students to get these specialized
credit scores done by the education loan specialized lender such as Credila Financial Services
([Link])

How can I increase my score?

While it is difficult to increase your score over the short run, here are some tips to increase
your score over a period of [Link] your bills on time. Late payments and collections can
have a serious impact on your score.

Reduce your credit-card balances. If you are "maxed" out on your credit cards, this will affect
your credit score negatively.

If you have limited credit, obtain additional credit. Not having sufficient credit can negatively
impact your score.

How much loan do I need for education?

Cost of education includes:

 Tuition Fees
 Other fees payable to academic institute
 Hostel fees
 Living expenses
 Books, instruments etc.
 Computer and other education material

Students and parents should review their savings and decide on whether they are looking for
full amount of education to be funded by the education loan or only want part loan. Due to
the tax benefit, many parents prefer to take maximum loan amounts.
How much loan can I get?

Banks typically ask for margin money (i.e. up front money paid by parents) and can only
cover part of he total education costs. However, education loan specialized lenders can cover
100% of these costs.

What is Margin Money?

The money that gets put in by student/parents towards the education is called margin money
(e.g. if parents put in Rs. 100,000 out of total education cost of Rs. 500,000, then Rs. 100,000
is called the Margin Money)

What are the KYC (Know Your Customers) Norms ?

Know Your Customer - KYC enables lenders to know their customers and their financial
details to be able to serve them better.

KYC is required to establish the identity of the client. This means identifying the customer
and verifying his/ her identity by using reliable, independent source documents, data or
information.

Yes, it’s mandatory for any loan. The regulatory authorities have made it compulsory for all
lenders to Know Their Customers through KYC norms for security reasons.

What is Field Investigation?

Most of the banks have expert agencies to verify and validate information provided in the
education loan application. These specialist agencies verify the address given, they do
employment verification, bank verification etc. There are a lot of other investigations are
done based on the information provided in the education loan forms. This process is called as
Field Investigation.

What is Collateral Guarantee?

For loans of higher amount, banks require the loan to be guaranteed by Collateral such as
land, property, Fixed Deposit Certificate etc. This is required by banks to ensure that in case
the borrower defaults on the loan, there is some guarantee given against the loan..

It must be understood, that the process can take a long time if appropriate documents are not
submitted in time. Also, banks have to check title deeds of the collateral provided. In many
cases, there are independent specialist agencies who work on behalf of banks and
independently submit the report to the bank about the valuation of the given collateral.

It’s, therefore, suggested that the education loan application process must be started well in
advance.

What is Collateral Valuation?

Since banks are taking collateral (such as land, property, share certificates etc.) guarantee
against the education loans, banks typically want to find out the valuation of the given
collateral. It’s done with the objective to find out how much loan can be given out against the
collateral guarantee offered.

Expert agencies, which are empanelled with the banks, perform a detailed analysis of the
collateral. They submit a collateral valuation report. Typically banks offer the education loan
amount which is lower than the valuation of the collateral.

However, some specialist education loan providers like ([Link]) can offer some
flexibility in that front.

What is Employment Verification?

Some banks perform independent verification of the employment records of the cosigner of
the loan, which is typically parents of the student who are applying for education loans.

It’s important to note that if appropriate pay slips and other employment details are given to
the bank well in advance, a lot of time can be saved while processing your education loan
application.
LOAN OPTIONS
EDUCATION LOANS PROCESS

Get Get Loan

Qualified Approval
Organize
Your
Documents

Supporting Select the

documents Best Loan
Option

Know Your
Customers Close
(KYC) the
Documents Loan forms Loan

Full time Graduate and post graduate courses, professional courses include Engineering, Medical,
Architecture, Management, Law, Agriculture, Veterinary, Dental, Computer etc. are some of the
courses that are applicable for getting education loan. Bank typically has their own list of courses,
which are eligible for loans. They sanction loan for only those allotted courses. If you are looking for
education loan, first visit the bank to check whether the course you are going for is covered under the
bank and also check the interest rates and general eligibility criteria.

The students who are pursuing higher degree education are eligible for education loan. The loan
amount covers the expenses such as tuition fees, other fees payable to the academic institution,
caution fund, hostel fees, traveling expenses, cost of books, computers, instruments and other
education materials.

The loan amount sanctioned should be subject to the repayment capacity of the parent/student. Bank
typically asks for margin money. Margin money is the upfront money paid by the parents.

Education loans have lowest interest rates as compared with other financial loans, which ranges
between,

Loan up to 4 lakhs: 11-12%p.a

Loan over 4 lakhs: 13-14% p.a

The processing fees for education loan include title search fees, documentation preparation fees, cost
for general validation and verification etc. This is in the range of 2-2.5 %.
The required documents that would be submitted while applying for education loan may vary from
bank to bank. The most common documents include

1. Proof of admission

2. Fee structure from the educational institution

3. Marks list of the qualifying examination

4. Photographs

If the applicant is earning, the documents such as Income tax assessment order of last two years, bank
account statement, income proof etc. are needed.

Almost every bank requires a co-signer or guarantor for every loan. Parents or relatives typically act
as co-signers or guarantors. If the student defaults on the loan amount the guarantor has the
responsibility to repay the loan. Typically bank looks at the employment and financial details of the in
relation. Instead of Guarantor, bank accepts securities such as house, gold, share, fixed deposit
receipts, National Savings Certificates etc.

Education loan has generous repayment option. The students should spend their school time for
studying, not working to repay the loan. For this reason most banks allow students to pay back their
debts only after six months or one year (varies from bank to bank) after you complete the course or
six months after you have secured a job, whichever happens first. This gives students time to settle
down and find a job before starting repayment.

There is a tax advantage in education loans. Interest repayments on education loans are tax deductible.
A deduction under section 80E of the Income-Tax act for the interest paid on an educational loan can
be claimed. This deduction is allowed for 7 years and the loan must be taken for higher education
purposes only and loan has to be from a financial institution or a government approved charitable
institution.

BANK’S PERSPECTIVE ANALYSIS

From banks’ perspective, education loans are bitter-sweet due to the policy of Reserve Bank of India.
It has instructed banks, not to accept any security or collateral for loans of up to ` 400,000. Hence, the
risk for banks is literally higher and education loans are still a small portion of banks' overall loans
portfolios. Many deserving students struggle to get loans because banks ask for a co-signor to the loan
and for 100% collateral to cover the loan even when it contravenes government rules.

As per the current status, banks offer up to one million INR for the study within India and up to two
million INR for offshore study. If students are asking for more than ` 400,000, they need to put in
some money of their own. To be specific, it is 5% for domestic education and 15% if the student is
going abroad. Many banks unofficially have listed institutes’ name for the loan however they do not
publish those names on the other hand, they publish a list of courses which qualify for loans. It means
students have to visit to the nearest bank to know whether he or she qualifies for the loan or not.

At the moment, interest rates on these loans vary from 11.25% to 12.75% depending on the amount of
loan. These rates can change during the term of the loan, in case the Reserve Bank of India raises
broad interest rates. Union Bank of India, for instance, is charging only 10.5% to students. Women
pay 0.50 percentage point less. Unlike banks, HDFC's CREDILA charges different rates depending on
the school and the student's grades. Its interest rate ranges from 9.75% to 12.5% currently.

Some foreign colleges may require a proof of finances at the time of admission. But, most banks in
India don't sanction a loan till the time students submit confirmed admission proof. HDFC-backed
CREDILA has a solution to this dilemma. It provides a letter of credit on behalf of the student which
typically satisfies the college, and then converts it to a real loan when the admission goes through.

Students are expected to start repaying their loans within six months of landing a job or after one year
of graduation, whichever is sooner. Most banks require that students pay simple interest on the loan
even as they are studying. The loan is extended for five years to seven years typically.

ANALYSING CURRENT SCENARIO

CEOs of large commercial banks seek the support of the Reserve Bank of India to secure a
government guarantee for education loans. They raised this issue in the meeting when chiefs of large
commercial banks meet RBI governor D. Subbarao.

Mounting bad loans in the education loan segment is a key concern for most banks as 2-3% of total
education loans have become sub-standard loans.

Banks requested the central bank to take it up with the government to provide a guarantee, at least for
loans below ` 4 lakh, as stated by a news reporter.

Students availing the education loans of less than ` 4 lakh do not have to provide any security or
guarantee. Further, government-owned banks are not able to reject or withdraw education loans.

The government has made it very clear that state-owned banks cannot reject any education loan unless
they have a substantial reason to do so. If a loan is rejected, the student can directly approach the
government (finance ministry), who in turn directs bank to approve the proposal.

So far, state-owned banks have disbursed education loans aggregating ` 32,000 crore to 1,698,601
students. As of now, only state governments such as Karnataka and Maharashtra are providing interest
subsidy on education loans. Even as the government announced plans to provide an interest rate
subsidy for weaker sections of the society, the scheme is yet to be implemented. Banks want the
government to guarantee all education loans across state.

Besides education loans, banks will also seek flexibility from RBI on classification of home loans up
to ` 30 lakh as priority sector loans. As of now, only loans up to ` 20 lakh are treated as priority sector
loans. Banks say the average ticket size of the loan has risen to ` 30 lakh as property prices have
raised sharply.

Banks will also seek flexibility in treating loans to the road sector as secured loans. Since the land on
which the roads are constructed belongs to the government and that it is for public utility, the land is
not pledged with banks. As a result, all loans given to build roads are classified as unsecured loans
such as Personal Loan. Banks have to provide a higher risk weightage on unsecured loans, making
such loans expensive even though they are infrastructure loans.

Banks may also indicate to RBI to provide clarity on the base rate — the new system of pegging
interest rate on loans, which will come into effect from July 1. Banks can choose to calculate the base
rate, taking into account the cost of deposits and profit margin. The central bank has given banks
freedom to choose deposit bracket and profit margin instead of prescribing a uniform method for all
banks. Banks expect RBI to indicate a standard deposit bracket for all so that the rates are comparable.

Most banks have said they will wait for policy cues from RBI in the future policy before taking any
decision on lending and deposits rates. Banks are also looking forward to the central bank's projection
on credit and deposit growth for this financial year. In 2009-10, RBI has revised its credit projection
twice — from 20% to 18% and subsequently, it was lowered to 16% due to poor demand for credit.

RBI had signalled a higher interest rate by raising key policy rate on March 19 — the repo and the
reverse repo rate — by 25 bps each.
SCHEMES OFFERED BY VARIOUS FINANCIAL INSTITUTIONS

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