For Indian students who wish to pursue higher studies the dream of pursuing education a foreign institute seems like a distant one, especially if they hail from middle income backgrounds. Despite grade based financial aids and scholarships provided by foreign universities the increased cost of education is difficult to cope with.
For such aspiring scholars, an education loan seems like manna from heaven. With growing ambitions of young Indian scholars, the popularity of these loans has grown manifold over the years. Instituted at the turn of the century, loans for education have grown at a CAGR of a 13% from Rs 20,500 crore to Rs 69,700 core.
The above numbers however belie the woeful story of public sector banks who are battling high NPA ratios in the education loan category. In FY17, banking analysts flagged the worsening of asset quality in the loan space of education, especially in the category of Rs 4 lakh or lesser lent to borrowers in the sub 21 years age group.
As a result, traditional lenders such as banks have taken a step back in such loans, with more stringent credit assessment criteria and lower sanctions and insistence on collateral. In the meanwhile, non-banking finance companies or NBFCs have stepped up their game, and are expanding their loan books. In recent times NBFCs focussed on education loans specifically are grabbing eyeballs. So are NBFCs a good option for education loans? Let’s take a closer look:
How do they differ
To understand, whether NBFCs would make a good option for an education loan, let us understand what makes them different from banks. The primary difference is the credit assessment process. While banks focus on the credentials of the parents such as income, CIBIL score and years left in employment, NBFCs have adopted a more student specific approach.
They asses the aspiring borrower on his or her own credentials such as scorecard at various levels, GRE scores and use analytics to find the probability of them securing a job post the completion of their education. Unlike banks, they are specialised NBFCs that offer short term loans for skill based vocational courses. As a result of their focus, NBFCs are able to contain their NPAs in this segment.
Many a times, an aspiring student may need an education loan at the eleventh hour after he learns that his application has been accepted at an university of his choice. At times like this, he may need a loan within a week. For such cases, banks would not be an ideal choice, as their verification processes are long drawn and take a minimum of a fortnight. NBFCs on the other hand, given their focus on the segment, have the quickest turn around time and may sanction a loan in a matter of a few days and accept online submission of documents.
The interest rate differential and processing fee
While processes are undoubtedly smoother when it comes to taking loans for education from NBFCs, banks still score when it comes to interest rates. For education loans both in secured and unsecured category the interest rate differential is 2-3%. While this may not seem like a big amount upfront, over a tenure of 10 years, this interest rate differential can amount to a much larger outflow from the borrower. Further the processing fee on such loans ranges between 1-2% of the loan amount in NBFCs, whereas, a bank would generally waive off this fee even on the basis of a good CIBIL score.
Thus, as you can see, while NBFCs have faster processes and niche credit assessment techniques, banks score where it comes to the interest rate differential. Thus, while NBFCs are not to be ruled out while considering loans for education if you are in a tearing hurry, a little planning in advance can help you save big bucks in the long run if you take a similar loan from a bank instead.
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