Well this blog has become more of a place for me to scribble, than to practice and improve writing skills 🙁
Nevertheless, the next September intake is due to arrive at HEC in a few months! I am sure they would have several questions on their mind! So after Satyendra messaged me with one such question, I quickly got onto this post (especially since not many have dealt with this aspect and I had been thinking of writing this for the past three months. Thanks Satyendra for the nudge)
Intended Audience: Candidates from India who want to take a student loan from France.
Others, read on if you find any similarities with the system in your country, else feel free to drop out mid-way.
Disclaimer: I did attempt this thing. Got the guarantee issued from India. But, finally backed as by the time I learnt all the aspects of this, I ran out of steam and time!!
Why take the student loan from a French Bank (say BNP Paribas)?
- They offer a rate of only 3% as opposed to the likes of 14% APR in India!
- A maximum tenure of 10 years with a maximum moratorium period of 3 years, as opposed to a maximum tenure of 7 years in India
What does BNP Paribas (Jouy-en-Josas) need to process this?
- A guarantee from a French resident that you won’t run away. And if you do, the guarantor will pay up! OR
- A guarantee from a Bank in India that will pay up(again) if you run away and default on your payments to BNP. If the loan is intended for 5 years, the guarantee should be for 5 years (not lesser) [Edit: June 28, 2012: The guarantee is sent as a SWIFT message and has a format defined by BNP Paribas. You need to get in touch with BNP Paribas, France and procure the sample format to be forwarded to the Bank in India. Check the HEC website financing section for contacts details]
Beware: The process moves very slowly in Jouy. Especially since the BNP branch we deal with is in Jouy-en-Josas (which is quite small) while the international Bank guarantee (BG) is received at a head office somewhere in Paris. Yes you should be prepared to know that email travels slower than snail-mail!
I have no clue how option 1 works! I have tried option 2, and that’s what I will elaborate on
Which Banks in India can help you ? What is the product?
What do you need to ask the bank for? An “International bank guarantee”
Stressing on the ‘International’ is essential as it changes the rules of the game. Be prepared, you would be surprised to know that barely any managers know the concept of “International Bank Guarantee”
Which banks in India do this? I tried this with: ICICI, HDFC Bank, SBI, Indian Bank, Bank of India etc etc. I got positive responses from SBI, ICICI, HDFC Bank. Chances improve if this is done in major cities (I would make that Metros + Bangalore + Hyderabad)
What do the Indian Banks ask in return?
To issue the International BG they would need collateral in either of two forms below:
- In full cash (in the form of Fixed Deposits)!! They must be crazy! But it is what it is!
- In cash + property (Almost impossible to get because of the “International” thing)
Now the math! (Put in your own numbers, this is just an example)
- Desired Loan Amount: 30000 Euros
- Exchange Rate: INR 70/-
- Equivalent Guarantee Amount in INR: 21 Lakhs
- Duration of BG: (say) 10 years
- Collateral: Banks usually ask for at-least 110% collateral cash collateral. Say 120% here.
Caveat 1: The wonderful trend between the Euro and INR has screwed this up, and banks now ask for higher % collateral to cover their risk. (I had negotiated a 120% when banks said 130%)
Caveat 2: The first caveat also makes banks say, that they need higher collateral % since the BG is locked for several years, and they wouldn’t know which direction the Euro would move! To this, I would say: “Lock my FD for those many years, and let the interest accumulate”, in case of an unfavorable movement, your risk is covered to some extent”.
Ok now, the costs!
The Commissions / Fees
- Banks usually charge about 2 to 3% per annum of the amount of guarantee.
- At 2%, here, the fee would be (2% of 21 Lakhs) x 10 (the no. of years) = 4.2Lakhs
- SBI charges 1/4th the commission % if collateral is full cash. So let’s make this 1.05L
Caveat 3: Ask the bank to issue the BG for shorter duration (say 1 yr or 18 months) on a renewable basis. The approval process for shorter duration BG is a lot simpler and moves faster as against a 10 year BG request. Advantage of doing that, upfront collateral % can be negotiated downward, but subject to annual revision depending on exchange rate. Also, the upfront fee maybe locked up as an FD and the bank can be told to break this up each period to get their commission and re-issue the BG.
So BNP Paris still gets an annual BG with a commitment to renew the BG for 10 years. You earn interest on the 4.2L as an extra bonus.
Total Money to be put in the FD: (21 x 1.2) + 1.05L = 26.25L!
If I had this money, why don’t I pay the school right away?
Well that’s your choice, but here’s the spicy twist to the tale:
This 26.25Lakh fetches you an interest ~ 9% p.a (as of June) in India in a fixed deposit instrument. You pay the commission at 0.5% and an interest to BNP of 3%. Net you earn 5.5% on this huge amount. (Keep in mind taxes and TDS to fine tune).
In my opinion, it is a good option to use, but bear in mind the RISK: Exchange Rate! It has played a big spoil sport in the recent past. So do the math right and if you have additional resources to put in in case the exchange rate becomes more unfavorable.
Why didn’t I do it eventually?
I had paid the commission for only one year, and BNP refused to accept that guarantee for the loan of 7 years. By the end of it, I had run out of energy to do this. I was working with SBI (Indiranagar, Bangalore). And yes, set your expectations straight, SBI is faster than BNP is!
Have others done it before? Yes there are people who have done this!
Now, it is clearly your call!
Please do share with others if you manage to pull-it-off! In fact, try pooling in multiple candidates together in the same city, gives you more bargaining power with the bank!
All the best!