Sun Sep 15 16:18:14 UTC 2024: ## Banks to Be More Cautious With Second Education Loans Following RBI Ruling
The Reserve Bank of India (RBI) has rejected a request from banks to avoid treating the realignment of existing education loan terms with a second loan’s repayment period and moratorium as restructuring. This decision is likely to result in higher interest rates for students seeking a second education loan.
Previously, banks had sought flexibility from the RBI, recognizing that students often take on a second education loan to pursue further studies after beginning repayment on their first loan. To alleviate the financial burden, students typically requested deferment or extensions on their first loan, leading banks to seek regulatory relaxation on restructuring.
However, the RBI has maintained that such changes to the existing loan would constitute restructuring, resulting in banks needing to account for increased credit risk. This means that banks are likely to be more cautious in approving second education loans, potentially leading to higher interest rates for borrowers.
Banking expert V Viswanathan suggests that banks may choose to decline new loans or require a different lender to take over the original loan if it remains a “standard asset” in the first bank. Alternatively, parents may be offered loans against other securities or unsecured loans to cover the existing student loans.
The RBI’s decision could potentially classify the first loan as a non-performing asset (NPA) if the student’s ability to repay is affected by pursuing higher studies. This classification would require banks to set aside provisions for the loan, potentially reaching 40% if collateral is not provided.
While the new loan for further studies could be considered a standard asset, upgrading the existing loan to a restructured status requires either 10% of the revised repayments to be made or repayment to commence after one year.
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