Indian banks have reportedly presented a proposal to Reserve Bank of India (RBI) to reclassify the first unpaid education loan by students as 'standard', if they are seeking a second loan. This proposal also includes extending the repayment period on such education loans.
The rationale behind this proposal is to provide students with more leeway to gain work experience after completing their initial degree before embarking on higher education, according to a report in the Economic Times.
At present, under existing norms, when borrowers partially repay an existing education loan, lenders are obliged to classify it as 'restructured.'
This classification results in higher interest rates for borrowers if they intend to take out a fresh loan for additional studies.
Traditionally, student loan repayments commence after a one-year moratorium period.
For instance, in the case of SBI student loans, repayment starts after the course period and then begins one year after course completion, or six months after securing a job, whichever is earlier.
The challenge arises when borrowers decide to pursue further studies and wish to defer repayment of their existing education loan.
At present, under the new restructuring guidelines, debtors have the option to choose a moratorium, request the suspension of equated monthly instalments (EMIs) for a few months, or, reduce EMIs to continue regular payments.
However, when a loan is restructured, it is reported to the credit bureaus as "Restructured," thus affecting the borrower's credit rating.
In such cases, securing another loan can be difficult without first repaying the existing one.
Banks are now proposing that the repayment period or moratorium period of the first loan be realigned with that of the second loan.
If RBI approves the proposal made by the banks, the existing loan will not be classified as 'restructured', and the account will retain its status as a standard asset.
Manoranjan Sharma, chief economist at Credit rating agency, Infomerics Ratings, welcomed the proposal, particularly in light of students' financial struggles at the start of their careers.
"While the generic strategies in banking and finance relate similarly to all customers, students are disadvantageously placed because of their lesser earnings, lower awareness of financial products, unsuitable financial advice, and limited repayment capacity," he said.
He added that this measure would benefit both banks and students, reduce the burden of overdue loans, and prevent a choke in funds to students.
"While the banks would benefit from the dreaded concept of quick mortality accounts or at least check partially surging non-performing assets (NPAs) in education loans, the students would benefit from their loans not turning bad, and thus the flow of funds to the students would not be choked and they would also not be required to pay penal interest chargeable on repayment of overdue loans," Sharma added.
This proposal comes at a time when credit rating agency CRISIL predicts a 40 per cent growth in education loans offered by non-banking financial companies (NBFCs), reaching Rs. 35,000 crore in fiscal year 2023-24. This is due to an increasing number of students pursuing education abroad.
It should be noted that education loans are typically available at a lower rate of interest at public sector banks, and prepayment penalties are usually absent. This makes it advisable for borrowers to aim for prepayment, thus reducing the overall cost of the loan.