Converting an NPA Account to a Normal Account in Education Loans

Many students who study abroad or study in prestigious universities in India have to take education loans to finance their education. However, there are circumstances and challenges such as the sudden demise of an earning family member, unexpected unemployment or underemployment can make repayment very difficult. When such repayments are overdue for more than 90 days, then the loan account is considered a Non-Performing Asset (NPA). An NPA account in bank does not generate income and this label can severely affect the applicant’s and co-applicant’s credit rating. Once the credit rating goes below a certain limit, then getting financial aid like credit or loan becomes next to impossible.

Now, this situation might seem very challenging, but converting NPA to a normal account is possible and many defaulters have successfully converted their NPA back to a normal account.

In this blog, we will understand how to convert an NPA account in bank to a normal account with insights to help students regain their financial stability and creditworthiness.

Understanding the Implications of NPA Status

Before we proceed, let us understand what happens when an account is NPA. The following are the effects when your education loan account gets converted to NPA:

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  Severe impact to your credit score as well as to your co-applicant's credit score. Your failure to repay will be reported to credit bureaus.
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  Getting additional credit in the future will be very difficult because of your lowered credit score.
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  Recovery agents may call or visit you or your co-applicant like your parents, which can be mental harassment to you as well as to your family.
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  Banks or lenders may take legal action against you, which would be stressful as well.

Hence, it is very important to address the issue of NPA promptly to avoid further complications. Various banks like SBI, UBI, BOB, and more have NPA recovery policies. For example, SBI has SBI NPA recovery policy for SBI NPA settlement and similarly, other banks have it too.

Steps to Convert an NPA Account to a Normal Account

Let us understand how to convert an NPA account to a normal account by following the steps mentioned below:

Carefully Understand Your Current Financial Situation:

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  Before you start the process of resolving your NPA account, you first need to assess and understand your current financial situation by considering every aspect very carefully. You cannot miss anything at this stage. 
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  Create a detailed and complete list of all income sources, savings, monthly expenses, and existing debts and sort them according to priorities and deadlines. 
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  You do not want more than one NPA account, so avoid any other penalties. 
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  Once this step is done, you will get a clear understanding of how much you can allocate toward clearing the overdue amount.

Communicate with Your Lender:

Communication is the key in this situation. You need to have open and honest communication with your lender or bank. You can follow the following steps:

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  You need to reach out to the loan officer handling your loan account and explain your financial situation in detail.
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  Do not try to cover up or hide any reason or mistake on your part, because it will show in your ledger.
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  No lender or bank wants NPA, so most likely, they will listen to you and may offer solutions such as restructuring NPA accounts, providing an extended repayment period, or temporarily reducing the interest rate. 
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  Building a good rapport with the lender can also make the process smoother and more efficient.

Restructure the Loan:

The first thing you can ask your lender or bank is to restructure your education loan. Restructuring NPA accounts involves modifying the terms to make repayment more manageable for you. It is done to your financial condition. This can include:

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  Increasing the Loan Tenure: Extending the repayment period reduces the monthly EMI amount, making it easier to pay.

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  Lowering the Interest Rate: Some banks or lenders may agree to lower the interest rate temporarily to reduce your EMI and thus reduce the financial burden on you.

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  Offering a Moratorium Period: A moratorium period provides a temporary pause on repayments, giving borrowers time to manage their finances. Please note that interest will be charged during the moratorium period, but you do not have to pay your EMI during the moratorium period.

Discuss these options with your lender or bank to find the most suitable arrangement.

Set Up a Repayment Plan:

Once the loan is restructured, create a repayment plan that you can follow without defaulting. Any mistake here will destroy your credit score and your financial credibility. Clearing your overdue amount should be your priority. You can take the following steps:

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  Allocate a fixed part of your income exclusively for loan repayments.
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  Cut down unnecessary expenses so that more funds can be allocated for repayments.
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  Any extra money you get like bonuses and monetary gifts should be used to pay off your debts.

Consistency is the key here. Regular payments, even if they are small, will show your commitment to repaying the loan.

Explore Government Assistance Programs:

In India, several government education schemes aim to support students struggling with education loan repayments. Here are some of the government schemes available for students:

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  Central Sector Interest Subsidy (CSIS) Scheme:This scheme provides full interest subsidy during the moratorium period for economically weaker section (EWS) students pursuing professional and technical courses.

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  Dr. Ambedkar Central Sector Scheme: This scheme offers interest subsidies for students belonging to the Other Backward Classes (OBC) and Economically Backward Classes (EBC) categories who pursue higher education abroad.

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  State-Specific Loan Waiver and Subsidy Schemes: Some states in India offer partial or full loan waivers to eligible students under different financial aid programs. For example, the Gujarat government offers abroad education loan assistance through its various education loans for Gujarat programs.

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  Padho Pardesh Scheme: This scheme provides interest subsidies for minority students pursuing higher studies abroad. This scheme has been discontinued.

Research these options to check if you qualify for any benefits that can reduce your financial burden.

Seek Professional Advice:

If you feel that the situation has gone beyond your control and you are not able to figure out any solution, then you are welcome to contact us. We, at GyanDhan, are experts when it comes to education loans for abroad and for India. We will take up your case and one of our dedicated loan experts will guide you on the best possible strategies so that you can make an informed decision.

Use Savings and Additional Income Sources:

To accelerate the repayment process, tap into your savings or explore additional income streams such as freelance work, part-time jobs, or selling unused assets. These extra efforts can significantly reduce the time it takes to clear the NPA status.

How do Banks Re-classify an NPA Account?

Re-assessment or re-classification of an NPA account is done once the overdue amount is paid in full including the principal and the interest. The review is done by banks at multiple levels. After confirming that all the payments have been made and no dues remain, the account will be reclassified as a "standard" or "normal" account. This process is very important for improving your credit score and regaining financial stability.

Preventing Future NPAs

As you have understood by now, getting an NPA label is very damaging to your credit score, and reclassifying it as a normal account requires dedicated planning and effort. Now, we must understand that preventing an education loan from becoming an NPA requires proactive financial planning and communication. Here are some tips to prevent future NPAs:

Start Budgeting Early:

Create a budget during your studies to track your expenses and savings. Having a financial plan early helps you manage repayments.

Build a Savings Buffer:

You never know when an urgent need for money comes up, so it is better that you set aside a portion of any income, no matter how small, as an emergency fund. This buffer can help you cover loan EMIs during periods of financial difficulty or unexpected situations.

Monitor Loan Terms:

Stay informed about the terms of your loan, including repayment timelines, interest rates, and available benefits. You can keep checking the news regularly and if you face any difficulties, communicate with your bank timely to check for possible solutions before the situation worsens.

Focus on Timely Payments:

Make it a habit to pay your EMIs on time. You can set auto repayments to prevent payment misses. Timely payments not only prevent the loan from becoming an NPA but also enhance your credit score, improving your financial prospects.

The Role of Banks in Resolving NPAs

Banks play a significant role in converting NPA accounts to normal accounts. They provide the following options:

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  Loan Restructuring Options: These options are provided to help you with your loan repayments and are designed as per your financial conditions.

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  Moratoriums: These are temporary relief from repayment obligations during difficult financial times. Please note that interest continues to accrue on your loan amount and is added to your loan balance once the moratorium period ends.

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  Guidance: Banks also offer professional advice on repayment strategies and available benefits.

Banks understand that assisting borrowers not only helps in loan recovery but also strengthens long-term relationships.

Converting an NPA account to a normal account will initially look very challenging, and in fact it is, but once you plan and dedicate yourself, it is achievable. By taking proactive steps, from understanding and assessing your financial situation to communicating with your lender for restructuring options along with professional advice, you can restore your NPA to a normal account. Consistent efforts and support from your bank will help you resolve the NPA status and restore your creditworthiness.

Addressing an NPA status is not just about repaying a debt; it’s about rebuilding your financial confidence so that you can take credit or loans in the future. If you have an NPA right now, do not worry, take the first step today and work toward restoring your financial health, remember one payment at a time is enough to make a difference.

Frequently Asked Questions