Bankers seek parent comfort in student loans

Banks want parents of students seeking educational loans to be made co-borrowers to facilitate loan recovery after completion of studies as part of a proposed student educational loan finance scheme.

The proposed scheme prepared by the ministry of human resource development (HRD) seeks to ensure availability of loans to every needy student enrolled in an "eligible" educational institution, without any collateral or margin money. The student borrower would also not be required to present any co-applicant.

A working group of senior executives from select public sector banks, under the aegis of the Indian Banks' Association (IBA), has suggested to the government that loans be sanctioned at the place of residence/ domicile of the student so that banks can comply with know your customer (KYC) norms.

The proposed scheme envisages a greater involvement for educational institutions. Students would have to apply for a loan through the educational institution.

The institution would be responsible for accepting and screening the applications and would forward the applications in bulk to the bank for sanctioning loans.

The working group has suggested that KYC norms be in-built into the scheme and responsibility for complying with the norms fixed, considering that banks would have a limited role in compliance of KYC norms and loan appraisal under the proposed scheme.

Banks have also sought a clarification on the competent authority to decide the eligible educational institution and suggested that in the case of de-recognition of an institution, there should be a provision for readmission of the students in any other recognised institute.

The working group was not in favour of linking repayment of loan to the student reaching a certain income threshold after completion of studies as proposed under the scheme. It has also asked that the repayment schedule be shortened to 7-10 years from a proposed repayment tenure ranging from 7-25 years.

A fixed interest rate during the entire duration of the loan till repayment has been proposed and fluctuations, if any, in the interest rate would be met by the government out of a special fund to be created for the purpose. Banks have submitted that the mechanism for reimbursing interest subsidy to banks needs to be worked out.

Banks have proposed a complete exemption from income tax for repayment of loan as an incentive to repay the loan.

The scheme suggests a waiver of loan for students taking up teaching as profession. The working group has suggested that the necessary arrangement for repayment to the bank in case of a waiver needs to be made.