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Banks’ may turn more circumspect when considering student borrowers’ application for a second education loan.
The Reserve Bank of India (RBI) has rejected Banks’ request to not treat realignment of the existing tenure of an education loan with the repayment period and moratorium of a second education loan as restructuring.
What this could mean is that students who take an education loan for pursuing a professional degree and want to continue further studies with a second education loan may have to pay more interest rate for the second loan.
A restructured loan has implications for banks in terms of provisioning for any diminution in the value of the loan.
Background
Banks had brought to the attention of the regulator that student borrowers approach them to avail of a second education loan for further higher studies, after repayment of the first loan has commenced.
As students’ ability to service the first education loan gets affected once they join higher studies (post-graduate courses), they request banks to defer/extend moratorium for repayment of this loan. As a result, banks had approached RBI seeking regulatory relaxation on restructuring.
RBI’s contention
RBI reasoned that as per its master circular on ’Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances’, any such relaxation would result in non-recognition of increase in credit risk associated with the change in terms and conditions of the existing loan.
Banking expert V Viswanathan said, “The existing Banker may not entertain new loans. But it is possible he can ask for take over by another banker while it is a “standard asset” in the first bank.
“It is also possible that parents can be given a loan against other securities or unsecured loans to clear the existing loans in the name of the students.”
He observed that interest rate for the new loan will be higher in order to compensate the bank for the income not recognised and additional provisions. Further, a bank may ask the parents to start repaying the original loan as per schedule before considering the new loan.
NPA applicable
Viswanathan noted that given that a student borrower’s capacity to repay his/her first education loans will be affected as he/she pursues further higher studies with a second education loan, the existing (first) loan will be treated as non-performing asset (NPA) and attract provisions of NPA. If not backed by collateral, provisions may go up to 40 per cent. However, fresh loan for higher studies can be treated as a standard asset.
Upgrading the existing loan, treated as restructured, can be done only after 10 per cent of the revised repayment instalments is paid or at least repayment has commenced after one year.
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