INDIA: Staking home for an education

When Abhishek Kundu approached the State Bank of India for an education loan to study for an MBA the bank flatly refused.

"They wanted me to secure admission in a particular institute first. Then they wanted collateral for a loan of over Rs600,000 (US$12,800) and a guarantor for the interest payments during the study tenure," said Kundu.

That was four years ago and Kundu is now working for a multinational corporation in Mumbai. His loan for admission to the course was sanctioned by another bank the day before the deadline for admissions applications - at a steep 12% interest rate.

"I had to run from pillar to post to get it done," said Kundu.

He is not alone in having a tough time trying to finance a degree. Many families are forced to put up their homes and investments as collateral.

Anita Vaghela, whose daughter took out a Rs1,600,000 loan to study in the US, had to put up her Delhi residence as collateral. "There was no other option. We had to provide both the house papers and my husband's provident fund papers to the bank to secure the loan," says Vaghela, a homemaker.

Banks may also ask the student for an existing insurance policy as collateral, or require the student to buy one.

While the middle classes in India have actively pursued higher education for their children, rising aspirations among the lower middle class and poor have led to increasing demand for educational loans, despite their having to put assets on the line.

"The Indian middle-class family always gives priority to education. Indian parents will go to any extent to ensure that children are educated and employed. Many parents don't think twice before taking a loan if they cannot afford the tuition fee," says Naresh Gulati, CEO of Oceanic Consultants, an agency that helps Indian students with admissions abroad.

At present Indian banks will lend up to Rs1 million for higher education in India and double that amount for overseas study, with interest rates varying from 10 to 15%.

Loans of up to Rs400,000 do not require collateral while loans between 400,000 and 750,000 require a third-party guarantor.

Credit above Rs750,000 needs to be backed by tangible collateral security such as property, preferably houses, government securities, gold, shares, or a third party with assets matching the loan amount.

With more students willing to take education loans to fund their study, banks are required by the government to actively lend towards education.

Yet credit is not readily available to all. Harsh Roongta, CEO of the comparison website Apnaloan.com, said loan applications were closely scrutinised with banks looking at a range of factors from the student's repayment capacity to the institute's credibility. Banks can deny loans for low-ranking institutions in India.

Students believe the success of loan applications can depend on the banks' discretion. "In small towns if you know someone in the local bank office then it is a big help," says Prashant Nanda, a business journalist, who hails from Cuttack, a small town in the eastern state of Orissa.

Nanda had a difficult time securing a loan to study for a masters degree in India because the institution he applied to is new and not well known.

For study abroad, banks are less willing to support diploma courses. But they are more open to lending towards a professional programme which has employment opportunities such as business and management, engineering, mathematics, sciences, computer science and health professions.

"I have taken a loan of two million rupees to pursue my MBA at Duke University's Fuqua School of Business. The loan amount is staggering but I am confident of getting a great job because this is one of the best management schools in the US," said student Satish Nair.

The recession in the West has made little difference to the number of education loan applications.

"The number of students from India enrolled in US universities and colleges passed 100,000 in 2009. So students are not shying away from the West because of an economic meltdown," said a State Bank of India official who did not want to be named.

"Since Indian students began facing problems in Australia, there have been fewer applications. But the US and UK are still popular destinations," the official said.

In 2009 about 1,860,000 students were given loans, up from 1,527,000 students the year before, according to the Indian Banks Association.

Education loans made by state-owned banks increased by 33.5% in 2009 and the banks disbursed a total of Rs350 billion in such loans up to December 2009, an increase of Rs87.85 billion over the previous year.

The huge rise in loan seekers has been attributed to the increasing cost of higher education. But it also means many more families are risking their homes and other assets for the sake of a university degree.