The education ministry headed by Mr. Kapil Sibal (actually the ministry is called Human Resources Development but the most important thing it looks after is education) is in the limelight following the realization that higher education and vocational training are the best poverty alleviation tools in the long run.

Lot has already been written about what needs to be done in the higher and vocational education sector. There are plenty of valid suggestions on how to energize this sector by increasing capacity, improving quality, making it more accessible and removing it from the clutches of the government bureaucracy and bringing in the private sector.

One important element of reform in this sector will necessarily be in the area of education loans. We have already seen the difference that easier availability of loans can make in the housing and consumer durables sector. Education can be another sector that can benefit tremendously by easier availability of education loans.

Today education loans in India lack any institutional backing and suffer from the disease of “good intentions”. Let me explain. At the best of times education loans are a risky business for the banks in any country. The typical higher education or vocation education student will take around 2-5 years to complete his education. He will need a fairly large loan to complete his education. Most likely he will not have any collateral security to offer for the education loan. In most cases his parents (or other close relatives) may be willing to stand guarantee for the due repayment of the loan but their own income may not be sufficient to repay the loan in case the student is unable to complete the course for any reason or is unable to find a job after he completes the course. In fact in a majority of cases the student’s family is not even in a position to pay the interest on the loan during the time when he is undergoing the course. They require that the interest amount also be accumulated and the repayment (of both principal and interest) begins only after the course is over and the student gets the job. So in summary the bank is expected to lend money to a borrower without any collateral security and without sufficient current income to pay back the loan solely on the hope that the student will acquire skills good enough to get a job that will pay him enough to enable him to pay back the loan. So left to themselves the banks are not going to disburse significant amount of education loans except to the well heeled who can provide collateral/guarantee.

In most countries government funded specialized institutions (such as the older version of Sallie Mae in the US or the FFSAP - Federally Funded Student Aid Program) step in to ensure that loans are available for all students who are good enough to get into any accredited educational institutions that provides higher or vocational education. The loans are not cheap but the important thing is that they are available in spite of the credit issues surrounding education loans. The institution normally does not lend directly but provides back to back refinance (provide loans to lenders to enable them to on-lend to students) and share in the risk (write off part of such loans if the student defaults and is unable to repay) to make sure that this vital tool to make higher education accessible to everybody (and not just the middle and rich classes as is the case in India). Contrast this with what happens in India. The total incremental education loan disbursements made by the entire banking sector for last year was around Rs. 8,500 crores which is quite negligible considering the bank’s total deposit base. Compare this with the estimated home loan disbursements in excess  of Rs. 1,00,000 crores for the same period and the contrast is very clear.

So what is the reason for this dismal state of affairs? It is the attitude of the government that “talk” can substitute for action. The finance minister had promised to set up an Education Re-finance Corporation from part of the “education cess” that all of us pay. That promise is languishing in the bureaucratic by lanes of Delhi for the last 3 years. Meanwhile the policy makers hope that good intentions and strong words will somehow produce results.

Education loans are a part of the priority sector but have no separate allocation. Also education loans cannot be priced higher than 1% above the particular bank’s PLR. Thus banks like to do the other kind of priority sector loans (loans to small transport operators, professionals etc.), which they consider less risky. In fact, the private sector banks and foreign banks who cannot be bullied by the government, have completely kept away from the sector (some of them have “education loan programs” but they all require collateral and/or guarantee from a well earning relative and interest servicing during the course period which effectively means that they service only the well heeled sections of the society). The public sector banks on the other hand are forced to show some disbursements under this head, do the minimum that they can get away with without offending the government. They naturally have restrictive rules on the type of courses as well requirement of collateral/income based guarantee for loans above Rs. 4 lacs. All this means that there will be restricted finance available for potential students even as the education sector itself is becoming diversified and more vibrant.

In the current budget announced on July 6, 2009 the finance minister, in a clever play of words, has promised to subsidise  the entire interest expenses incurred during the course period  of students from the economically weaker sections who somehow manage to get the loan sanctioned from banks. He has said that about 5 lac students are expected to benefit from this scheme. This looks more like a statement aimed at the galleries rather than actually getting some results on the ground. It is very doubtful that the PSU banks in India will give loans to so many students belonging to economically weaker section of society.

In fact if a poor student was bright enough to get admission in say “Harvard” but did not qualify for student aid from the university, perish the thought that a education loan will enable him to do the course. He will probably have to do the rounds of the charitable institutions for grants/aid or probably some politician will take up his cause after the story is played up in the media. If he is not willing to do that he will probably loose the chance of completely remaking his (and the country’s) future.

Finance Minister routinely exhort the public sector banks to lend more towards education loans. It is no surprise that public sector equally routinely ignore this exhortation after paying lip service to education loans by releasing a few prominent advertisements in the media.

Then hon’ble education minister must ensure that the government puts its money where its mouth is and creates the state funded institution that was promised long ago. After that more education loans will actually get disbursed .

To that day – Amen

Things have been happening so suddenly. It was a while before I realized I am almost stuck in a trap (or at least to me it seemed to be so). I am not much of a savings person. I use my credit card a lot.

The only saving grace seems to be that I have taken no loans and I have no liability.
Otherwise I’d be stuck in a debt trap. With no way to know how to get myself out of it. Let’s just say that I am one of the “lucky” ones. What about those who are not so lucky? What can they do when in a debt trap?

One option is to go to a financial advisor or consultant. But, they can be expensive.
The better solution is to approach a credit counseling center. There are several credit counseling centers in cities across India.

Some banks also have own credit counseling centers too, such as the Bank of India-sponsored Abhay, at Dadar in Mumbai. This agency, the first of its kind, also has centers in Gumla (Jharkhand), Wardha, and Chennai.

ICICI Bank’s credit counseling centre, Disha has centers at Ahmedabad, Hyderabad, Vijayawada, Kanpur, Delhi, Chennai, and Kolkata.

These centers will help you chart out a plan to repay your debts. You can swap your high cost borrowings for low cost debt. Interest rates may be bought down to as low as 18 per cent for levels such as 36 per cent in some cases.

These centers can also help you restructure the loan portfolios and formulate repayment plans. They may also help borrowers negotiate with banks for restructuring debts.

Here are the addresses:

• Abhay (Bank of India), 61 A, Sadanand, 1st Floor, Above Bank of India Branch, Gokhale Road (north), Dadar (West), Mumbai- 4000 028. Call 022-24221843.
• Disha (ICICI Bank), Prince Apartments, Ground Floor, Karani Lane, Ghatkopar (West), Mumbai 4000 028. Call 65971815/86/87. Visit www.dishfc.org
• Union Mitra (Union Bank of India), Union Bank Bhavan, 239, Vidhan Bhavan Marg, Nariman Point, Mumbai- 400021. Call 022-22896502.

A personal loan can be taken for any use like financing wedding expenses, medical expenses, trips, renovation or construction of the house, etc. But a personal loan cannot be taken for speculative purposes. However the lenders are not concerned with the use of the loan and no guarantors or security or collateral is required.

Does the personal loan qualify for tax deduction benefits? The principal repaid does not qualify for tax deduction benefits. However, under Section 24 of the Income Tax Act, the interest paid for a personal loan taken for acquisition, construction and renovation of the house can be claimed for tax deduction up to Rs. 1.5 lakh. The borrower can claim tax benefits only after the construction is completed and possessing the property.

While claiming deduction the borrowers may need to show the certificate of completion of construction of house property. If this is not available then the proof of occupation by a certain date such as electricity bills, telephone bills etc. can also serve as a good proof of completion and occupation.

Thus you can fulfill your dreams by taking a personal loan and also claim tax deduction benefits.

Personal loans are gaining popularity among loan seekers in a big way. Be it planning a vacation or getting you daughter married, down payment of your new house or medical obligations, a personal loan may be used for any purpose. A personal loan may be a secured or an unsecured loan where the end use of the money is not supposed to be declared while taking the loan. The rate for unsecured personal loans ranges from about 15 % to 25 % per annum depending up on the credit history and the income of the loan seeker. This type of personal loan is more popular among the public.

The problem begins when people take these kinds of loans for investments into various instruments including equities. Markets have been pretty volatile for last few months and are expected to behave the same for quite some time. So if you planning to take a personal loan and invest in to equities of mutual funds thinking that the markets are at low then think again. The inflation rate has been moving up. The last numbers posted was well above 12%. With the growth in the Gross Domestic Product (GDP) around 8% to 9% the economy may see a negative growth in the current fiscal. The Reserve Bank of India has tried to tighten the liquidity situation by increasing the Cash Reserve Ratio (CRR) by 50 basis points. They may increase it by another 50 to 100 basis points if needed to keep a check on the inflation numbers. The condition worsens if the loan you have taken is on a floating interest rate. You end up losing money in the equity markets and pay more towards the loan at the same time. This is like being the rope in a tug of-war match where both sides are trying to pull you towards themselves to the fullest.

A better way to invest into equity market is by the way of arbitrage. It is buying in the cash market using the loan amount taken and selling it in derivative market by way of futures at a price which is more than the price bought added with the interest amount. On the day of maturity you reverse your position on both the markets and difference of the amount over and above the cash market price added with interest on the loan and the price sold in the futures market is your profit.

To explain arbitrage lets take the following example.

One lot of Reliance Industries Limited (RIL) is of 75 shares. Suppose the price of one RIL share is Rs. 2200 on 1st July, 2008. The maturity is on 31st July, 2008. The total amount of loan of 75 shares is (2200*75) = Rs. 165000. If the interest rate is 18% per annum then for one month the amount of interest is (165000*1.5%) = Rs. 2475 which is (2475/75) = Rs. 33 per share. Thus you need to short one lot of Reliance at any price which is more than (2200+33) = Rs. 2233. If you manage to short at a price say Rs. 2250, then you make a profit of (17*75) = Rs. 1275 on one lot which is almost 9.3% per annum. Now no matter what the price is on the expiry, you will manage to earn the amount stated above as you have already squared off your position.

The main thing over here is to find the right price to buy in the cash market and sell in the futures market. If you manage to hit the right price over the screen, then bingo! You have made money where everyone is losing it.

I wish to bring out a company before you which is looting the consumers and the general public. And yet, no one is able to stop them from doing it. After all, they are doing it so, legally. My father took a loan of Rs. 15, 000 from GE Money in face of some financial emergency. After a few days, we got the letter from them which stated that, we will be charged at a whopping 43% interest rate. Can you imagine such an interest rate? Yes, they have been and they are doing it. I felt very bad as it is a big loss and I immediately collected Rs 15, 000 from my relatives and went to close the account. On meeting them, they said that we can not close the account for 6 months. It was again such a fraud play. They would eat heavy interest in these 6 months and loot the consumers. Helplessly, we paid 6 EMIs of Rs 1, 104 each. Thus, we had paid Rs. 6, 624. And now, when we went to close the account, we were asked to pay Rs 15, 800. Yes, Rs 15800 for a loan of Rs 15,000! Is there something that can be done?

Personal Loans are loans taken to meet any type of personal expenses e.g. medical, marriage, family function, education, vacations, travel, home purchase, improvements etc. No security is needed but qualifying criteria is stringent and banks are more than happy to entertain qualified individuals with minimal paperwork. Personal loans are cheaper than credit cards, but more expensive than home loans. So if you have taken a personal loan and are thinking about prepaying the personal loan, you must base your decision on prepayment keeping the following things in mind.

Firstly you must be aware of the Method of calculation of Interest Rate for your personal loan. This is very important to know in order to compare other options (interest rates) available to you. Personal loans are usually given by either Flat rate, Reducing Balance or Advance EMI (normally used for consumer durable loans). In the flat rate methodology, the Interest charged is basically Simple Interest.So if you take a personal loan of Rs 2,00,000 at a flat rate of 15%, your Interest is going to be Rs 30,000 per year for tenure of loan. In the case of Reducing Balance, the EMI and the Interest computation is equated in EMI’s over the tenure of the loan and then you are charged. The Interest is charged on the Balance Outstanding. So effectively this means that between going for 10% flat and 10% reducing EMI method for same tenure, the reducing methodology is a cheaper option.

In Advance EMI lenders/banks normally take 2-3 EMI’s in advance effectively reducing your principal amount. Interest is charged on the entire amount instead of the reduced principal interest. So basically, for a loan of Rs 2,00,000 with 3 advance EMI’s(Rs 30,000) of Rs 10,0000 your loan may actually be for 1,70,000 but you may be charged interest on the entire Rs 2,00,000. Therefore, once you are aware of the method of calculation of interest for your personal loan you can consider the various options available at the time of prepayment and make a sound judgment on the prepayment of loan.

Secondly, an important factor to consider is the foreclosure penalty that you will have to pay while foreclosing (early payoff of loan) your loan. So if you have gone for a 1 year, 2 year, 3 year, 5 year personal loan and you decide to foreclose the entire amount, then banks charge you about 4%-5% as foreclosure loan. The reason is because at the time of taking loan they have quoted you a competitive rate based upon a set tenure. So if you think that you have money available to you through other means and that the 4% cost is something you are willing to incur, you can make prepayment of your loan. Also, when the bank offers you the option of pre-payment it does not give the flexibility of part payment . If you decide to repay the loan earlier than the pre-determined period, you have to pay the whole outstanding principal. If you have a minimal surplus available to pay a part of your loan that would reduce your interest burden, but the bank does not allow it.

Finally, the decision is based taking into account the above mentioned factors along-with the Interest rate scenario at the time of deciding to prepay. If Interest rates have risen since the time you have taken your personal loan it would make sense to continue with the loan. However if interest rates have fallen since you have taken personal loan it may be worth considering taking another personal loan (with reduced interest rate) in order to pay off the more expensive loan on the condition that the bank allows you to do so and after taking into account the various costs (processing fees of new loan, cost of foreclosure of old loan, etc), prepayment would still be the cheaper option.

The author is a Certified Financial Planner, working as Senior Manager with Mumbai-based SRE Financial Planners.

I received a letter from HSBC for a pre-approved personal loan of Rs 1, 13, 000 (Ref. No. PA2CD0907045922) I applied for a personal loan with HSBC. The legal documents (Demand Promissory Note, Agreement & 5 PDCs) were collected. I also had to pay Rs 350 to Citibank for the bank statement, sign verification & ECS charges. I called up the HSBC on 28/11/2007, the executive informed me that the personal loan application had been rejected. The Bank is not ready to disclose the reason. The Bank is also not ready to send me the legal documents back. What do I do now?

Is the any monitoring body to watch the interest rates charged by banks against personal loan? Is there any mandate from the RBI to the banks, asking them not to charge an interest rate above a certain limit? Do banks have the right to charge an interest rate up to 50%?

Is the any monitoring body to watch the interest rates charged by banks against personal loan? Is there any mandate from the RBI to the banks, asking them not to charge an interest rate above a certain limit? Do banks have the right to charge an interest rate up to 50%?