With over 1.33 million Indian students studying abroad, education loans have become vital. According to an Economic Times report, 33% of these students depend on such loans to pursue quality education overseas. Non-banking financial companies (NBFCs) have seen significant growth in education loan assets, rising over 80% in fiscal year 2023 and 70% in fiscal year 2024, reaching approximately ₹ 43,000 crore by March 31, 2024.
These numbers highlight the rising demand for education loans, but they also expose lenders to currency market volatility, particularly foreign exchange (FX) risk. Effective FX risk management is essential for lenders to safeguard against potential losses from currency fluctuations.
Understanding the factors driving FX changes and implementing protective measures is crucial for managing these risks.
Why Study Abroad Loan Portfolios Are Prone To Foreign Exchange Risk?
Two structural factors make study abroad loan portfolios particularly vulnerable to currency volatility:
Long Repayment Horizons Compound the Risk
Education loans typically extend 10-15 years, creating prolonged exposure to currency fluctuations. A student who borrowed ₹40 lakhs in 2015 when USD/INR was ₹65 would face significantly higher repayment obligations in 2024 with rates around ₹83—a 27% increase in their effective debt burden.
For lenders, this extended exposure creates:
- Greater difficulty in accurate portfolio valuation
- Increased provisioning requirements as borrower stress rises
- Higher likelihood of restructuring requests or defaults
Macroeconomic Volatility
FX risk also arises due to global economic and political developments, which can cause sharp currency movements. The inflation difference between the two countries, trade deficits, recession, or economic slowdown, among other factors, contribute to the volatility in exchange rates.
Lenders can deal with the exchange rate unpredictability and mitigate this risk by adopting various strategies. Find out what they are in the next section.
Study Abroad Loan Forex Risk Management: 4 Proven Strategies
Leading lenders protect their study abroad loan portfolios through four strategic approaches:
1. Innovative Loan Structuring
Lenders can offer loans to students in the currency of the destination country, thereby transferring the risk of currency fluctuation to the borrower. If the loan is in INR, the lender can sanction a loan with a buffer amount to cover the increase in living and tuition costs resulting from adverse currency movements.
Structuring disbursement in tranches to coincide with the tuition payment schedule can also help spread the currency risk over time rather than being exposed to fluctuation risk based on a single day’s FX rates. Lenders can offer students a step-up repayment plan where they pay less in the initial years and the payments increase in line with their career and earning potential over the years.
Lenders can offer to adjust the loan term and build flexibility into the loan structure to account for currency fluctuations. Finezza’s Loan Management System enables this flexibility through automated repayment recalculation and seamless loan restructuring when currency movements cross predetermined thresholds.
2. Operational Risk Management
A diversified loan portfolio, spread across different countries and currencies, can help mitigate risk and reduce exposure to a single currency. Lenders can use tools like Sensitivity and Gap Analysis to assess and measure the impact of forex fluctuations. These tools provide quantitative insights to lenders to make data-driven strategic decisions.
They can base their exposure across different currencies and geographies based on these insights and also price loans accordingly. Lenders can utilize predictive models to assess a borrower’s comprehensive financial profile, encompassing their academic background, potential earning potential in the foreign market, and country-specific economic conditions. This provides a more comprehensive risk assessment than traditional credit scoring alone.
3. Open Communication With Borrowers
Forex fluctuations impact both lenders and borrowers, so both must work together to address these challenges. Open, accessible communication about forex fluctuations empowers students to make informed decisions.
Banks and NBFCs can educate borrowers about the potential impact of forex rate changes on their monthly loan installments (EMIs). This will prompt them to budget effectively by setting aside a buffer for exchange rate volatility and monitoring exchange rates and prepaying when the home currency is strong, reducing the repayment burden and risk of default. Lenders can offer refinancing if the student starts earning in a foreign currency, eliminating FX risk during repayment.
The LMS from Finezza offers the Effective Loan Communication Management feature, facilitating personalised and timely communications.
Regular and proactive check-ins with borrowers allow lenders to monitor the students’ financial health. In case the student expresses concerns about rising costs, the lender can discuss various available mitigation options with them.
4. Leverage Technology For Managing Risk
The use of cutting-edge and emerging technology can also help lenders manage forex risk. AI or analytics-based tools can be effective in modelling currency risk scenarios and forecasting exposure. These tools analyse market trends, economic indicators, geopolitical events, and historical currency rates to forecast potential currency fluctuations. Based on the available data, lenders can anticipate future FX risks and adjust hedging strategies proactively. They can also have data-driven pricing of loan rates and margin buffers for loans.
Implementing early warning systems (EWS) for rapid exchange rate changes allows lenders to follow a proactive approach and take timely corrective action. EWS, through continuous monitoring in real time and automated alerts for fluctuations beyond thresholds, offers timely and actionable inputs to risk management teams.
Finezza’s advanced lending software solutions help lenders adopt a data-driven approach to managing risks and reducing defaults.
Conclusion
As the number of Indian students pursuing education abroad continues to grow, the significance of effective foreign exchange risk management in international education loans cannot be overstated. Robust strategies such as loan restructuring, leveraging technology, fostering open communication, and managing operational risk can help lenders mitigate the adverse effects of FX risk.
Automating the loan lifecycle streamlines loan disbursement and management; additionally, it also helps lenders manage their collections and risks better.
The Loan Management System from Finezza is a comprehensive solution that’s flexible and agile and automates the entire loan lifecycle. The Flexible Repayment Frequencies feature in the LMS allows for hassle-free loan structuring when required. The NPA and Collection Management feature offers valuable support to lenders in managing the FX risk and collections in study abroad loans.
Take the next step to streamline your operations and manage risk more effectively. Contact us today to discover how our Loan Management System can transform your study abroad loan process and manage forex risk.
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