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.
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