Education loans need to be re-engineered

At the inaugural function of the fourth ASSOCHAM International Educational Fair the HRD Minister Arjun Singh told the reporters that the government was considering a proposal to provide counter-guarantee for students who apply for bank loans for higher education. But according to some news reports it seems the HRD Ministry is playing with the idea of being a guarantor for the educational loans provided by banks. It is being considered that there might be possibility of creating a fund to maintain the guarantee which could be used for meeting NPAs that might rise out of these loans.

The alleged reason for this is that individuals have to provide collateral for loans that are more than Rs 4 lakh and, therefore the government is stepping in a socialistic fashion.

Although the commercial banks are trying to increase the facilities for educational loans but, unfortunately, they do not have adequate resources to finance income-based lending activities compared to asset-based lending.

For instance, activities such as trade, hotels and restaurants get similar treatment from commercial banks as the model for them is security- or asset-based lending and not lending based on projected cash-flows, because estimating risk premiums in the latter is more complex.

In recent times most of the large commercial banks have increased their educational loan portfolio. The quantum and terms of loans vary from bank to bank. Currently, they lend a maximum of Rs 10 lakh for studying in India and up to Rs 20 lakh for studying abroad. The fees covers: tuition fees payable to college/school; examination /library /hostel charges; travel expenses; purchase of books /equipment /uniform; and cost of two-wheelers (optional).

Repayment of the loan is in the form of equated monthly installments (EMIs) and the repayment generally starts one year after the course or six months after the graduate has got a job. The tenure of the installment can be from three years to eight years. Most banks do not charge margin up to Rs 4 lakh and, beyond that, some 5-15 per cent margins are charged. Likewise, security is not required for loans up to Rs 4 lakh; above this, security is expected. The interest charged is that of Prime Lending Rate (PLR) or one percentage above the PLR.

To encourage banks to lend more to the poor and needy students the government has brought educational loans under the domain of priority sector.

However there is no separate data available on the quantum of non-performing assets in these educational loans. But seeing the reports of these banks of educational loans given in the 1980s, there is not much to write home about.

On seeing the case study reports it has been found that even students from prestigious engineering and management institutions have not repaid educational loans, though many of them are well-placed in jobs in India or abroad, some earning in millions. Tracking them is a very difficult task in these days of job and city/country hopping among executives. It is well known in India, often, the higher the social status of a person, the worse-off is his behavior relating to public assets and loans.

Political compulsions and other policy pressures will force banks to continue to lend and this may increase the burden with a large level of NPAs, especially with respect to such loans. The defaults may not be due to the borrower’s inability to pay, but rather his unwillingness.

The banks have to do hard work and formulate policies to meet the educational loan requirements of all these classes along with this minimize risk associated with increased NPA in this sector as the higher the income of the person, the less he seems willing to play by the rules.

It may be sensible to take up the whole issue afresh and create an appropriate support model and re-engineer the entire educational sector as done in the case of the housing sector. The Finance Ministry should also create an Educational Funding or Finance Corporation, on the lines of the housing finance corporations. This type of corporation can be formed by many leading financial institutions, with a amount of at least Rs 1,000 crore.

The Corporation should have the members who have knowledge related to educational institutions, courses, opportunities and job prospects. It must create a national register of educational institutions and the fees charged by them, including the facilities offered, and also compile a profile of current and past students.

The loan sanctioned to the student’s should be charged from the first salary, and it should be the responsibility of the employer to deduct the EMIs and remit them to the bank similar to the tax deducted at source..

The employment application should compulsory which should have a column to collect information regarding the loan status of the prospective employee.

The employer can be any body in the public or private sector, such as a company, co-operative, corporation or a partnership firm. The employee will be responsible to inform his employer about his loan position and it should be the responsibility of the employer to deduct the EMI from his pay and remit to the bank.

On the certificates issued by educational institutions should clearly indicate if the student is a loanee, as in the case of a hypothecated vehicle mentioned in the RC book. After repayment of the loan and discharge note to that effect, the educational institution can remove the stamp from his certificate.

Even every passport should be carry the stamp mentioning the loan status of the person and if he has availed of an educational loan then immigration clearance should be mandatory and given only on clearing the loan.

In the case of students don’t get jobs after availing of the loan, the Government can recruit them as outsourced temporary hands in the respective Departments / Ministries and deduct the EMIs from their monthly pay/stipend.

No student should be denied education due to lack of resources and no bank should be denied its EMI due to lack of systems and a nonchalant attitude, particularly on the part of better-off sections.

There might be need to amend many laws and regulations (such as equating educational loan EMIs with TDS and stamping passports). But it is necessary to look at the issue as one of attractive opportunities available for all sections as education by definition equalizes different classes in society.

But Government should not effort using the socialistic paradigms of the 1960s by creating funds or by being the guarantor for loans because this will increase NPAs as it will be felt that the “Ma-Baap Sarkar” will take care of the repayment. Such things send wrong signals.

Education is consider to play an important role of equalizer across class segments and if learning has to be acquired by borrowing, the only way out is to strengthen institutions, instruments and regulations in this sector so that the repayment process can be made speedy and correct and promptly to the banks.

However it is equally important that youngsters are made to realize their responsibilities for their actions and make them understand that they are role models for future generations.

Thus, repayment of money borrowed for education is a social responsibility. Let us not try to cosset segments that are already pampered enough.

Education loans to include life insurance

The government’s keen interest in education loans has continued. After the HRD Minister Arjun Singh, announced the government’s objective to guarantee education loans to students, the Government announced its intention to include a life insurance cover with every education loan.

Expressing the need to modify the existing education loan scheme, it has suggested all public sector banks (PSBs) to add a life insurance cover on any student going in for an education loan. All public sector banks (PSBs) may also be asked to introduce facility of online request for education loans.

Like their earlier step, the new scheme of an insurance policy on the life of the student, at the time of granting of education loan, is to benefit both the bank as well as the student. The issue of modifying the existing education loan scheme (2004) is likely to come up for discussion during the Finance Minister, Mr P. Chidambaram’s meeting with the chief executives of PSBs.

Speaking on the benefits of the insurance, official sources said that in case of an unfortunate demise of the borrower, the bank would be able to recover the loan amount from the insurance amount.

For the student, this would inculcate a habit of taking insurance. A student, who is once covered by life insurance, even after repaying the bank loan, would be inclined to continue with the life insurance policy.

However, this new scheme as suggested by the government has been in use by UBI. Union Bank already has a provision for an insurance policy in their education loan scheme. According to that scheme, to lessen the cost of premium, a convertible insurance policy (convertible into an endowment assurance policy for 5 years) could be accepted. According to the scheme, in cases where the parent/guardian cannot bear the premium cost, the amount of premium during the period of education could be remitted by the bank to LIC to the debit of loan account.

There are hints that the Finance Minister may ask the Indian Banks’ Association (IBA) to incorporate specific clauses for life insurance (on the lines of the Union Bank’s scheme) in the model education loan agreement circulated by it to banks for implementation. Also, IBA may be asked to provide broad guidelines to banks regarding the material to be published in the loan forms about insurance options available to students.

Meanwhile, there are indications that PSBs may be asked to provide facility of web-based online request for education loans. A presentation is likely to be made by Corporation Bank, which already offers such a facility.

Govt proposes to be as guarantor for education loans given to poor student

Government has stood up to help the students of the poorer sections to take loans for higher education. The government is planning to act as a counter-guarantor so that the financial burden does not fall entirely on the family.

During the international education fair organized by Assocham Union HRD Minister Arjun Singh announced, "We are actively considering the proposal."

He said if the proposal is approved, the government will stand in as a guarantor for students who take educational loans, so that the loan-obtaining process becomes easier and the family does not bear the brunt alone.

Giving clarification on the need for the government to provide counter-guarantee, HRD ministry sources said as per prevailing norms, an individual has to produce collateral for any loan above Rs 4 lakh.

"Indian Bank Association has not changed this norm for students seeking loans. As a result, the benefit of loan scheme would have reached only few. Therefore, government will have to intervene," officials said.

However it remains to be seen what action the finance ministry takes on the initiative taken by the HRD, though it is being considered in view of polls drawing close there are chances of the proposal of getting through.

The HRD minister has already put on all the efforts for this proposal, saying higher education could not be left to market forces, and that the government needed to be proactive.

Although Assocham had included the proposal among its recommendations on higher education, the HRD ministry has been working on this for some time.

Singh’s support comes barely a week after Congress chief Sonia Gandhi snubbed him at a public function, by praising PM Manmohan Singh for leaving his personal imprint on education reforms.

The HRD minister also stated that the state should play a key role in education. He added reforms in higher education should take in real sense and not to be undertaken just because the word "reform" has become fashionable.

Singh repeated that he is not "foreclosing opportunities" for cooperation with the outside world or the private sector, he said, "we should not be dependent on borrowed ideas".

He added, "It’s not that nothing good has come out of our education system. Look at the recent achievement by our space scientists".

The recommendations of Assocham’s were turned down by the minister — that higher educational institutes should be free to fix fees after keeping 25% seats reserved for the poor.

"Education cannot be bought and sold over the counter. Higher education will be meaningless if it is not accessible to all," Singh said.

Banks to provide education loan online

Soon six to seven banks in the country will be providing "Online loan application" facility from this academic year in a move to simplify education loan formalities.

Speaking on the occasion at the inauguration of 1327th branch of the Oriental Bank of Commerce Finance Minister P Chidambaram said the facility will be extended to all the banks in the course of this year itself.

He said in the last financial year the nationalized banks in India created a world record when they provided education loan to 12,51,692 students to the tune of Rs.19,771 crore.

"It is world record that a country holds. In no other country, such large number of students has been given education loan. I am not including the education loan extended by the private banks when I mention it is a world record. It is also a historic achievement. The loans help the middle class and poor people," Chidambaram said.

Finance Minister added next year scholarship facility will be extended to two lakh students for pursuing school education after the eighth standard, which has been planned for one lakh students for this year.

The scholarship scheme has been introduced for the best and meritorious students who are not able to pursue their education. The Rs 6000 per year scholarship scheme for poor meritorious students was decided in the cabinet meeting held on May 9.

Apart from this, he said, a separate pre-matric scholarship scheme has also been implemented for the children of those engaged in "menial jobs" to pursue higher education or ITI or diploma courses.

He added the 'Scheduled Caste meritorious students' scholarship scheme has been extended to 15,370 students, whereas 20,000 students will get benefited from the financial assistance given to the minorities to pursue their education. The government has also made plans to encourage students to pursue pure science and research activities and give special incentives for them.

"More schemes to promote higher education are on the anvil," he said without elaborating. Responding to the Opposition's challenge as to how the government would implement the farm loan waiver scheme, Chidambaram said, "we know how to provide for Rs 60,000 crore farm loan waiver that would benefit four crore farmers and it would be done before June 30. The Government targeted to provide farm loan to the tune of Rs.2,80,000 crore this year".

He said the government has given strict instructions to provide loan for all students who have secured seats in higher educational institutes and people should exploit the facility.