How a weak rupee will affect student borrowers

As the rupee-dollar parity becomes increasingly skewed, students in search of quality overseas education are in a quandary. To provide them relief, the Indian banking sector has just vowed to stand by all such students who want to study abroad, by agreeing to top up all educational loans either taken recently or being processed, to meet the gap created by the falling rupee.

Huge Cost Of Education Abroad

For an international student, the cost of studying at a US university for a year, inclusive of tuition and living expenses, varies between $25,000 and $60000 for an undergraduate course, and $25,000 and $60,000 or more in case of MBA. At the current exchange rate, that works out to Rs 13 lakh-plus to nearly Rs 32 lakh per year. Bankers said the average loan size for foreign studies is about Rs 14 lakh while they are allowed to lend up to Rs 20 lakh. Payments are made every semester. The rupee has slipped 17% in the last five months. Parents will have to cough up more if the local currency stays at this level for the entire tenure of the course for which the loan was taken.

New Borrowers Hit Hard

Investigations conducted by ET reveal that the weakening rupee is impacting various borrowers in the education space in a number of ways.

The main disadvantages:

A student borrower who is getting a top-up now from the bank, in effect, will have to pay back more, since the top-up will get added to the loan amount;

A parent who is funding a child's overseas education from personal savings will be critically hit as the rupee slips more and more. The Reserve Bank of India says Indians remitted $45.8 million between April and August and $150 million in 2010-11 for overseas studies. But the rupee depreciation has come as an advantage for students who are about to start repaying their loan after having completed studies and having got a job abroad that pays in dollars.

They will be smiling all the way to the bank since they will need to pay less due to the falling rupee. Those who have already paid the course fee either from their own pockets or through loans will not be impacted from the exchange rate fluctuations since they will be paying back in rupee through the contracted EMI process.

It May Only Get Worse

The pain of students planning to study abroad is likely to multiply Foreign exchange players anticipate the rupee to come under more pressure. Money changer Centrum Direct's vice-president and treasury head Hariprasad said: "The volatility in the currency market is likely to continue for at least another quarter. If the RBI does not intervene to curb the fall, then much lower levels for the rupee can be expected."

Jagannadham Thunuguntla, strategist and head of research at the New Delhi-based SMC Global Securities, said: "It's not the bottom of the panic. It's just the beginning. Even 58-60 levels for the rupee-dollar exchange rate are possible from hereon." Accordingly, students who have just taken educational loans or are in the process of getting one would need a top-up.

"We shall certainly stand by the students for their increased educational loan needs on account of currency fluctuations," said Indian Bank chairman and managing director TM Bhasin. The students and their co-applications will, however, have to bring in more collateral for the top-up. "It will differ from case to case, based on the cover available and the value of relationship," Nair said. Bank of Baroda executive director RK Bakshi said: "Individual cases will be decided on specific merits of the case. In credit, there is no one-size-fits-all plan."

Atmadip Ray & Sreeradha D Basu, ET Bureau Nov 23, 2011, 03.45am IST