Open Forum
New Delhi, 19 July 2011
Education Loans
SET TO PINCH LESS
By Col. (Dr.) P. K. Vasudeva (Retd)
Adv Inst of Development Studies, Chandigarh.
In this season of admissions to
educational institutions, students have something to cheer about. A proposal to
extend the re-payment period of education loans from 5-7 years to 10-15 years
to facilitate easy re-payment and reduce the probability of default in pending
with the Union Finance Ministry. Mooted by the Indian Banks’ Association (IBA),
the scheme will increase the flow of education loans not only in terms of
volume but also in value and tenure thereby spreading the re-payment burden
over a longer term.
True, the flip side is that undoubtedly
the interest burden would rise for those who opt to repay the loan over a
longer term. But, at the same time lower EMIs (equated monthly instalment) would
benefit the borrowers who cannot pay in short terms. Moreover, the economically
weaker sections would benefit the most.
This is not all. The staggered loans
would also help those borrowers who opt to take a top-up or step-up
facility. The IBA, which submitted a revised scheme to the Union Finance Ministry,
suggested that the students who want to pursue higher studies be given this option.
For example, if someone has borrowed for, say, an undergraduate course, banks would
now be able to provide additional credit to the student to pursue a masters,
MPhil or PhD programme as well.
Significantly, the education loan scheme
was discussed by the Union Finance Minister Pranab Mukherjee with the heads of
public sector banks and financial institutions during a meeting recently. According
to knowledgeable sources, the banks, on their part, were agreeable to the
proposal provided the Government chipped in with a sum of Rs 4,000 to 5,000
crore to set up a Credit Guarantee Fund to provide comfort to the lenders in
the wake of rising defaults. Recall, the idea, was first suggested by the
Planning Commission a few years ago, to ensure that the banks are protected in
case of defaults.
Importantly, the other key
recommendations besides the extension of the tenor of repayment, by the expert
committee constituted by the IBA are the creation of the Credit Guarantee Fund
and a moratorium period of educational loans. Asserted the Chairman and
Managing Director, Indian Bank T. M. Bhasin, “A portion of the funds in the
corpus could come from the Government and a portion from the banks. A certain
portion of the premium on loans could also be set aside in the corpus,” he
added for good measure.
Other bank chiefs too concurred and
stated that the rise was partly due to the global economic slowdown which had
lowered job hiring, notwithstanding some recovery in recent months. However, for
the Indian Government the bigger source of worry is the falling growth rates
--- both in terms of the number of loans sanctioned as also in value terms.
In March 2008, the loans sanctioned
were 12.47 lakhs totalling Rs 19,817 crores, in 2009 the sanctioned loans were
over 16 lakhs and the amount increased to Rs 27,646 crores. Again in 2010, the
loans passed totalled 19.28 and the amount availed rose to Rs 35,628 crores and
this year the loans aggregate 22.36 lakhs and the amount dispersed is Rs 43.074
crores.
Thus, the growth in the number of
accounts has moderated from over 45 per cent in 2004-05 to 32 per cent in 2007-08
and a shade below 16 per cent during 2010-11. Furthermore, during the last four
financial years, the number of loan proposals approved by the banks has nearly
doubled. In addition, when it comes to the amount outstanding, the growth rate
was 49 per cent in 2004-05 but moderated to around 39 per cent in 2007-08 and
slowed down to 20.9 per cent in 2010-11.
Therefore, the cumulative
outstanding under education loans for all the banks is standing at about Rs
45,000 crore till March 2011 and the defaults are in the range of three to five
per cent. But, the defaults are higher on loans below Rs 400,000, which are
collateral free.
At the same time, some senior
managers of the State Bank of India
and Punjab National Bank in the Tri-City when queried about the implication of
this extension of education loan scheme said that the moratorium period on such
loans were typically six months. But, they now feel that it should be extended
to one year to help the students repay their loans comfortably.
Clearly, the proposal is excellent
but the banks need to exercise caution. They need to address the question
whether they have the capacity to handle such a large number of students
applying for loans. One suggestion put forth by senior managers is to undertake
capacity building in the banks to face a colossal rush of students and cope
with the outflows. Simultaneously, some step up facility would also need to be
created by the banks for expediting quick re-payment of loans. If the banks
have to surmount this serious problem. ---- INFA
(Copyright, India
News and Feature Alliance)
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