The ministry of finance has declined for any immediate need for credit guarantee funds to back education loan as proposed by the Indian Banks’ Association (IBA). The public sector banks have been demanding for credit guarantee fund from government as the number of defaults in education loan is increasing.
An official of the banking division of the finance ministry said, "We are not convinced that a fund needs to be created at this point. The aggregate figures that we have do not give us any cause for concern.” According to ministry the gross defaults are below 3 per cent which is ‘manageable’, therefore banks’ fears are misplaced.
During the meeting with finance minister the banks had not brought adequate data with them so the ministry has asked them to submit detailed data with to assess the actual position on default. The official said, "The banks had not come at the meeting with the finance minister with adequate data to justify their demand. We want more details before we move forward on the matter."
On August 14, the PSU chief executives had met finance minister, Pranab Mukherjee, in which IBA had put forward a suggestion for the creation of a fund to support banks on their education loan portfolio as there is increase in the repayment defaults.
After the meeting K Ramakrishnan, chief executive officer, IBA, told FC that the discussions on a credit guarantee fund for education loans was at initial stage. He said, “The proposal is in an initial stage.” However IBA did not give suggestion regarding the size of the fund.
The banks have been asked to submit a break-up of the defaults under various categories, including loans up to Rs 4 lakhs, above Rs 4 lakh and up to Rs 7.5 lakhs and those above Rs 7.5 lakhs by the finance ministry.
Currently banks are giving education loan of up to Rs 4 lakhs without any security or co-obligation of parents, for loan above Rs 4 lakhs to Rs 7.5 lakhs banks ask for co-obligation of parents along with collateral security in the form of suitable third party guarantee. Further for loans above Rs 7.5 lakhs banks ask for co-obligation of parents along with tangible collateral security for suitable value along with the assignment of future income of the student for payment of installments.
The student has to repay the loan within co-obligation of parents along with tangible collateral security for suitable value along with the assignment of future income of the student for payment of installments.
According to bankers in the coming days there is a possibility that education loan given with out security can become as a major source of defaults. In the meeting with FM bankers informed that education loan is mainly being taken by those students who are joining institutes where ratio of getting a job is very low which can lead to increase in the defaults. an official of Punjab National Bank pointed out, “Education has now become a big business. All sorts of institutes have come up and banks cannot deny loans to students and there are fears that students might not get job or not a commensurate job to pay back loan. If denied, applicants put pressure on banks from government and elsewhere.”
As per the data available with the finance ministry, at the end of March 31, 2010 the total outstanding of education loans of the 27 public sector banks amounted to Rs 34,192 crore in 18,51,106 accounts. In this SBI lead the pack which reported the total loans of Rs 8,907 crore, while Indian Bank total loans stood at Rs 2,308 crore, PNB reported Rs Rs 2,272 crore, Bank of India at Rs 1,719 crore and Andhra Bank at Rs 1,647 crore among the top five in terms of outstanding loans.
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Student loan is usually needed for active students for so many reasons. It may be to procure a car so that commuting would be easier or to augment the cash at hand to take care of various academic bills including the tuition fees.
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