RBI to Restrucutre Educational Loans to Help Students Pursue Higher Education

Students seeking a second loan for higher education may benefit if the Reserve Bank of India (RBI) accepts a bank proposal to reclassify the first unpaid education loan as'standard' and extend the repayment period.

Banks argued in a September submission to the RBI that this will benefit borrowers who choose to gain work experience after an initial degree before pursuing higher education.

Existing regulations require lenders to classify an existing loan as'restructured' if it is partially repaid by a borrower. Borrowers will face higher interest rates if they take out a new loan as a result of this.

"If a borrower takes an education loan and starts to repay it after the end of the moratorium period, it is difficult to secure another loan without repaying the existing education loan in case the borrower decides to pursue further studies," said a bank executive, who did not wish to be identified.

In their submission to the RBI, banks stated that in such cases, the repayment or moratorium period of the first loan should be realigned with the repayment period of the second loan.

"If the regulator accepts this, then the existing loan will not be treated as a restructuring and the account will continue to be a standard asset," said the manager.

The classification of an account as'restructured' causes banks to make additional provisions for such lending and has an impact on the borrower's credit rating.

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