Yet another academic year is around the corner and the education industry is looking for larger sales and profits. The cost of education has gone up in the last decade and even pre-primary education has become expensive with capitation fees or donations at entry level. A family with two children needs to spend at least Rs 2,000 per month on education even in a modest school. At the higher level, that is, in professional courses, the annual expenditure goes up to a couple of lakh rupees depending on the institution and the entry mode.
Commercial banks are gearing to enhance the facilities for educational loans but, unfortunately, they are not adequately equipped to finance income-based lending compared to asset based lending. For instance, such activities as trading and hoteliering are treated similarly by commercial banks as the model is security - or asset-based lending and not based on anticipated future cash flows since estimating risk premiums in the later is more complex. Recently, most large commercial banks increased their educational loan portfolio.
The quantum and term of loans vary from bank to bank. Currently they lend up to Rs 10 lakh for studies in India and up to Rs 30 lakh for studying abroad.
The loans typically cover:
1. Tuition fee payable to college/school,
2. Examination/library/hostel charges,
3. Travel expenses,
4. Purchase of books/equipment/uniform, and
5. Cost of a two-wheeler (optional).
Repayment is in the form of equated monthly installments (EMIs) and the first payment generally commences one year after the course or six months after securing the job. The tenure can be from three to eight years. Most banks do not require any margin up to Rs 4 lakh. Beyond that a margin of five to 15 per cent is collected. Similarly, collateral is not required for loans up to Rs 4 lakh. The interest charged is 3 to 3.5 percent above base rate
It is also to be noted that to encourage banks to lend more to the poor and needy students, education loans up to Rs 10 lakh for studies in India and Rs 20 lakh for studies abroad are considered priority sector advances.
|No of Accounts [lakh]||22.13||24.60493||24.77||25.72|
|Balance O/S [crore]||41343.81||49068.96||50954.12||58256.23|
Table shows that as of 2014 the outstanding balance of only PSBs is of the order of Rs 58,256 crore with nearly 26 lakh accounts.
There are some news reports to suggest that the HRD ministry is toying with the idea of being a guarantor to the educational loans being provided by banks. There is also a possibility of creating a fund to sustain the provision of providing guarantee and which may also be used for meeting NPA generated out of these loans. The ostensible reason for this is the need for an individual to provide collateral for loans which are more than Rs 4 lakh and hence the government wants to step in, in as a socialistic fashion.
There is no separate data available on the quantum of non-performing assets in these educational loans. The experience of many of these banks pertaining to educational loans provided in the '80s has been far from impressive. Anecdotal evidence suggests that even students from prestigious engineering and management institutions have not repaid the loans and many of them are in well placed jobs in India or abroad, earning in millions. Tracking them is difficult as many of them change their jobs and and even city or country of residence. As we are aware in India, the higher the social stratum of a person, the worse off is his behavior pertaining to public assets and loans. Due to political compulsions and other policy pressures banks will continue to lend and may be saddled with large amount of NPAs with respect to these loans. It may not be due to inability to pay by the borrower but more due to unwillingness to pay.
The banks have to perform a tightrope walking in meeting the educational loan requirements of all these classes and at the same time minimise risk associated with increased NPA in this sector since higher the income of person lesser is his willingness to play by the rules.
It may be prudent to look at the whole issue afresh and create an appropriate sustainable model and re-engineer the entire educational sector as in the case of the housing sector. The ministry of finance should create an Educational Finance Corporation [EFC] one the lines of the Housing Finance Corporations. The corporation can be co-founded by many leading financial institutions with a corpus of at least Rs 1,000 Crore. The said institution should be equipped with people who have knowledge pertaining to educational institutions, courses, opportunities and job prospects. It should cover all types of education including school/vocational/skill formation etc. Incidentally today LKG is very expensive with even Rs 2-3 lakhs as entrance "donation". Banks do not fund school education but that of IIT/IIMs - It is like giving loan to third and fourth floor but not for the foundation. The parents can pay EMIs even for school education. EFC should create national register of educational institutions and the fees therein including facilities and also profile of current and past students.
The loan sanctioned should be the first charge on the salary of the student and the onus should be on the employer to deduct the EMI and remit it to the bank. It should be similar to that of tax deduction at source. The employment application should mandatorily have a column to collect information regarding the loan status of the prospective employee. The employer can be any entity in public or private sector like company, cooperatives, corporation or a partnership firm. The onus is on the employee to inform the employer regarding the same and it is the responsibility of the employer to deduct the EMI from pay and remit to the bank.The certificates issued by educational institutions should clearly indicate if the student is a loanee as in the case of 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 when it comes to stamping a passport or granting immigration clearance, the clearance of pending loans should be mandatory. In case students don't find a job after availing of the loan, the government can recruit them as outsourced temporary hands in specific departments/ ministries and deduct the EMI from their monthly pay/stipend. The apprentice Act can recognise these unemployed borrowers as the first choice of companies. No student should be denied education due to lack of resources and no bank should be denied its EMI due to lack of safeguards and the nonchalant attitude of the better off sections.
We might have to amend many laws and regulations [like making educational loan EMIs as TDS and stamping passports] laws. But we need to look at the issue as one of enhancing the opportunities available to all sections since education by definition equalises the different classes in the society.
This should not be attempted by the government using the socialistic paradigms of the sixties by creating fund or by being the guarantor for loans. It will increase NPA since it will be felt that the "Mai Baap Ka Sarkar" will take care of the repayment. This will give a wrong signal. If education has to continue to play the role of equaliser across class segments, and if Saraswati has to be acquired by borrowing Lakshmi, then the way out is to strengthen institutions, instruments and regulations in this sector so that Lakshmi is returned to the abode from which she was borrowed, namely the bank. Equally important is to make youngsters responsible for their actions and make them understand that they are role models for future generations and hence repayment of borrowed money for education is a social duty and let us not try to pamper segments which are already pampered to the hilt.