But are you aware of it? Sometimes, banks simply deduct the outstanding from your account.
Srinath, a II-year mechanical engineering student, got a shock when he returned to India for his vacation this summer from the US. A chance visit to the public sector bank from where he had got his education loan revealed it had been unilaterally closed. The main cause of worry was that the family had not received documents of his father’s house that was provided as collateral for the loan. In addition, the loan tenure wasn't complete either. Nor had his I-20 (a document that provides supporting information for issue of student visa) expired.
Here's what the manager had to say, “The outstanding loan amount was negligible. It wasn't beneficial for us. Hence, we sought to close it.” True, the outstanding was a mere Rs 70. But, does that give a bank a license to unilaterally close an education loan?
The best part: The bank had simply withdrawn the outstanding Rs 70 from his father’s account which was with the same bank. While the amount may not sound significant, the question is can a bank simply withdraw money from your account without your permission?
“Only when the study has been abandoned or when a borrower has not acted in good faith (taking multiple loans for the same purpose), can a loan be closed by the bank during the tenure,” informed S Govindan, GM, personal banking and operations, Union Bank of India. Srinath's only option now is to approach the ombudsman, as his bank manager did not have the power to reopen the account.
Bankers said that banks cannot take such a step without intimating the customer. K Unnikrishnan, deputy chief executive, Indian Banks Association, said: “The bank should not have taken this measure. At the very least, the customer should have been informed in advance.” Ordinarily, the bank is allowed to close the loan only when it has been declared a non-performing asset (NPA).
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Borrowers must also take note of insurance. Education loans include an insurance cover for the student. This is a specific amount for a specific period of time. In some cases, banks do not bother to check with the borrower whether an insurance policy already exists. A borrower has the flexibility to attach a previously existing insurance to the loan. The deficit, if any, can be insured by the bank. This can help one save on premium charges.
According to the Reserve Bank of India (RBI), loans for education should be seen as an investment for economic development and prosperity. Banks, however, don't see it this way. Added Unnikrishnan, “At the end of the day, loans aren't government schemes. They are a commercial proposition.” Numerous banks have informed RBI that defaults in education loans in the sub-Rs 4 lakh category are increasing. The apex bank has told them to adopt a better way to recover these. According to banks, recovery has been tough as these were issued with no collateral. A credit guarantee fund has been proposed.
Also, banks now compulsorily ask for a guarantor for these loans. In case the student defaults, the guarantor is held responsible.
With the impact of the downturn on the job market, several banks, which normally set up counters at various MBA colleges in the country to disburse loans to new students, have abstained from doing so this year. They are, quite obviously, apprehensive about repayment.
The current repayment tenure for any education loan is five to seven years after commencement of repayment. Repayment can be started as soon as one starts employment, within a year’s period. If three installments are not paid consecutively, it is considered an NPA. A recall notice is sent and the loan closed.
Recently, the human resource development ministry had suggested extending the repayment period to six to 12 years, considering the impact of the economic downturn on the job market. As students and parents prepare to queue up for an education loan this year, a process that takes around three months, it is important to know the guidelines governing education loans. For ones who already have existing education loans, it is recommended that the guarantor or the borrower regularly check the loan status, and especially if the collateral is as important as one’s house.