A loan is a debt. The borrower is obliged to pay back or repay the lender at a later period. But it is surprising to note that in India, in the light of directed lending, many a loan is looked upon as charity — “a voluntary help to those in need”.

After the agricultural debt relief scheme implemented by the Central government a couple of years ago, recovery in farm loans has become a thorny issue for bankers as the beneficiaries expect some further waiver schemes to absolve them of all their liabilities.

The CMD of a public sector bank actively involved in agricultural lending has reportedly stated that 47 per cent of farm loans have become NPAs. The latest entry to the charity club is the education loan portfolio.

For Indian banks, the outstanding education loans are reported to be around Rs 50,000 crore. The four southern States account for a major share of the loans. The percentage of NPAs is estimated to be above 5.5 per cent. As majority of the loans are under the moratorium period for starting repayment, the NPAs are bound to go up in the coming years.

Education loans are classified as priority sector and are to be encouraged. These loans are to be treated as investment for future economic development and prosperity. Most of the developed and developing countries have student loan schemes.

From aid to right

In India, the education loan scheme was originally started to help meritorious students pursue higher education in technical and professional courses.

However, over the years, rules and regulations got diluted and any student who got admission in a course became eligible for a loan, irrespective of the marks or the process employed in admission.

Education loans started to be viewed increasingly as a financial assistance, not to be repaid. Though such loans are a boon for the poor meritorious students, they are becoming a political issue, particularly in politically sensitive States such as Kerala.

The recent arrest and detention of the branch manager of a private sector bank in Kottayam, in connection with the suicide of a nursing student allegedly due to non release of education loan by the bank, has become a controversial issue. Politicians, irrespective of the colour of their flags, are demanding sanction of education loans to all applicants as a matter of right.

The existing loan schemes of the banks in India are generally on liberal terms. Loans up to Rs 10 lakh can be given for studies in India and up to Rs 20 lakh for studies abroad. Loans up to Rs 4 lakh are given without any guarantor or collateral.

The rates of interest generally range 1-3 per cent above base rates. Many banks give further relaxation in interest to girl students and students paying interest regularly during moratorium period.

The loans can be repaid in instalments up to 84 months, starting one year after completion of studies or six months after getting employed, whichever is earlier.

However, the defaults in education loans are increasing. Large numbers of student borrowers are not able to get jobs within one year. In many cases, salaries are not sufficient to ensure repayments. This is particularly true in the case of nursing students who avail loan amounts disproportionate to their future earning capacity. In fact, some unscrupulous institutes fix their fees depending upon the quantum of security-free education loan of banks.

The high incidence of failure in examinations, such as that in engineering courses, also creates a large number of overdue loans. But there are borrowers who simply do not pay, in spite of getting lucrative jobs.

The percentage of default is found to be higher in loans without security and guarantor. Banks often face problems in tracking the beneficiaries after the course.

IBA guidelines

Considering the potential damage that NPAs in education loans can cause to the economy, the Indian Banks Association has come out with fresh guidelines on granting of education loans. The guidelines underline the basic banking principle that loans, including educational loans, cannot be claimed as a matter of right. It is to be left to the discretion of bankers to decide whom to lend to and how much to lend, of course based on transparent rules.

The IBA has urged banks to put in place an effective appraisal system based on sound commercial logic, while serving a noble social cause.

Only students admitted to recognised institutes by a merit-based selection process will be eligible for loans.

This will eliminate a large number of students selected in management seats paying capitation fees and donations. Banks must introduce a system to assess the employability of the student after the course.

Banks may use rating of education institutes and the individual student as a tool for improving the asset quality.

Highly rated students in highly rated institutions may be granted loans at lower rates.

Scholarships, concessions, etc, have to be taken into account while fixing the quantum of the loan. Vocational/skill development courses of duration of two months to three years also will become eligible for loans.

Repayment periods are being increased to 10 years for loans up to Rs 7.5 lakh and up to 15 years for loans above Rs 7.5 lakh.

Parent/guardian shall join as co-borrower even for loans up to Rs 4 lakh. For better monitoring, banks may advise the students to submit their PAN details during the course.

The revised guidelines may step up the recovery of the loans.

However, results will depend upon the general awareness and change of attitude towards education loans. Parents and students have to use this facility only on genuine need and only to the extent actually required.

(The author is a former Deputy General Manager, Syndicate Bank.)

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