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Education Loan EMIs to Get Cheap. Know the Benefits Introduced by RBI.

Updated On - October 1st 2019 By - Pranjal Singhal

Education Loan EMIs to Get Cheap. Know the Benefits Introduced by RBI.

The Reserve Bank of India (RBI) issued a notification on September 4, 2019, mentioning that all the loans issued by the banks in India need to be linked to an external benchmark issued by the RBI itself. Now, this will also include the entire spectrum of Education Loans for Higher Studies in India and Abroad.

Applicable from October 1, 2019, this move can benefit the education loan customers in India as the banks would be required to revise their interest rates at least once every 3 months. As per the latest notification, banks would be required to link their rates to any one of the following four benchmarks:

  • RBI’s Repo Rate

  • Govt. of India 3-months Treasury Bill published by the Financial Benchmarks India Pvt. Ltd. (FBIL).

  • Govt. of India 6-months Treasury Bill published by the FBIL.

  • Other benchmark market interest rate published by the FBIL.

Many banks have already started linking their loan schemes to RBI’s repo rate. State Bank of India was the first one to introduce a repo rate linked scheme in May 2019. However, the bank has withdrawn this scheme a few days ago and is planning to launch a new scheme with a better-linked benchmark. Union Bank of India Education Loan Schemes are also going to be altered according to the new guidelines.

How will the Students Benefit?

This new linking system is expected to benefit the students most who avail an education loan for their higher studies. Thousands of Indian students go for an education loan when it comes to funding their degree courses. With the updated guidelines, students will receive the benefits every time the RBI changes the repo rate.

Repo Rate

The repo rate is the rate at which the Reserve Bank of India (RBI), India’s central bank, lends money to all the commercial banks operating in India.

Currently, banks update their lending rates in the months following the RBI’s announcement. SBI follows a policy of updating the rate on the first day of the following month. However, in this process, many banks often delay considering the updated central rate and some even ignore it citing various reasons.

Now, as per the updated guidelines, it will become mandatory for banks to revise their interest rates at least once in every 3 months. So, for example, if the RBI reduces the repo rate by 25bps twice in a quarter, the banks would have to consider both of these reductions, i.e., a total of 50bps. This way, RBI ensures that the benefits are directly passed to the customers.

Exceptions

However, those families who have a high credit risk may not benefit much from this updated policy. RBI has clearly mentioned that the “credit risk premium will undergo change only if the borrower’s credit assessment undergoes significant change.” Borrowers need to focus on the word ‘significant’ here.

Student Loan EMIs are a huge burden to pay back. This updated policy will assist students and also act as an effective solution to the problem of rising NPAs.