According to the revised model for education loan, the repayment period is now extended up to 15 years depending on the loan amount

Indian Banks' Association (IBA) in its revised circular for education loan has recommended extension for the repayment period depending on the loan amount as well as asked banks to clear a loan application file within a month.

Prabhuta Vyas, senior vice-president, social banking, IBA told Moneylife, "The circular for the revised model on education loan was sent to member banks on 30th August with immediate effect.

Earlier, students had to start repaying one year after completing the course or six months after getting a job, whichever was earlier. The loan repayment tenure was between five to seven years. This has been extended to 10 years for loans up to Rs7.5 lakh and 15 years for loans above Rs7.5 lakh.

IBA had also recommended of creating a credit guarantee fund to tackle the problem of rising defaults in the loan category up to Rs4 lakh. "The recommendation (credit guarantee fund) is still pending with the government."

Prashant Bhonsle, country head of Credila Financial Services, which specialises in education loan says, "From the point of students and parents, the extended repayment is good news. As the EMIs amount decreases, the default risk also gets lower. This would also help to mitigate risk to a certain extend. However, this would be challenging for banks to track student borrowers for 15 years. At Credila, we provided tenure of repayment up to ten years, after understanding the need of the students. We felt that a student should not have any debt obligation during the initial years of his career."

Experts point out that there was no need to extend the repayment period as the student and their parents would have continued to apply for the loan and pay back on time. The higher extension of repayment period may lead to lesser lending by the banks. However, banks have welcomed the revised model of education loan.

An official with leading public sector bank, preferring anonymity, told Moneylife, "Our bank will redraft the scheme according to the revised model and put it before the board for approval. Up to ten years of repayment period is good considering five years of studies and two years of employment. Even housing loan has such repayment period. There is some risk, but the education loan scheme is becoming popular among the students and there is clear demand. Overall this revised model is pretty workable."

B Vara Prasad, general manager (retail, payments and settlements and third party products), Union Bank of India, says, "There is nothing wrong in the revised model. It would put less pressure on the students to repay his loan. We welcome such move."

The revised scheme proposed by IBA has addressed concerns and operational difficulties faced by the lenders. According to the revised model, merit would be the sole criteria to be eligibility for the approval of education loan, admission under management quota would be kept out of the scheme, loan quantum would be justified by the employment benefit and extension of the repayment period to reduce the burden on the beneficiaries.

According the revised model there will be no penalty on prepayment. There would be no processing charges levied on loans sanctioned. If banks charges, processing fee for student going abroad for studies, it would be refunded upon the student taking up the course.

IBA said, "Bank may provide 1% interest concession if interest is services during the study period and subsequent moratorium period prior to commencement of repayment."

It also said that meritorious students from the same family are eligible for the loan. "Existence  of  an  earlier  education  loan  to  the  brother(s)  and or  sister(s) will  not affect  the  eligibility  of  another  meritorious  student  from  the  same  family obtaining education loan as per this scheme from the bank," the IBA said.

According to the current guidelines, banks lend up to Rs4 lakh without any security. But for loans between Rs4 lakh and Rs7.5 lakh, they can ask for personal guarantees, and for a loan above Rs7.5 lakh collateral is required.