Lessons from educational loans

The Hindu Business Line, Thursday, Feb 23, 2006

R. Vaidyanathan

An education loan is an investment in the inter-generational sense and, hence, pointed policy formulations are urgently required in this sector, says R. Vaidyanathan, suggesting sustainable models for ensuring recoveries.

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 the preprimary education has become expensive with capitation fees or donations at entry level. A family of 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 runs to a couple of lakh rupees depending on the institution and the entry mode. The poignant story of the Dalit girl Rajani from Kerala who committed suicide and the travails of the medical student Vaishali highlight the prohibitive cost of higher education and the issues of getting loan. 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 20 lakh for studying abroad. The loans typically cover: Tuition fee payable to college/school, Examination/library/hostel charges, Travel expenses, Purchase of books/equipment/uniform, and

Cost of a two-wheeler (optional). Repayment is in the form of equated monthly instalments (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 5 to 15 per cent is collected. Similarly collateral is not required for loans up to Rs 4 lakh. The interest charged is the Prime Lending Rate or one percentage point plus. It is also to be noted that to encourage banks to lend more to the poor and needy students, education loans up to Rs 7.50 lakh for studies in India and Rs 15 lakh for studies abroad are considered priority sector advances. Bitter experience The Table gives the quantum of loans provided by public sector banks.No data is 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 1980s is not much home to write about. Anecdotal evidence suggests that even students from prestigious engineering and management institutions have not repaid the loans and many are in well placed jobs in India or abroad. Tracking them is difficult in these days of job- and city-hopping. Anyway, in India, the higher the social strata of a person the lower seems his responsibility to public assets and loans. Though it is necessary for financial institutions to observe prudence, due to political compulsions and other policy pressures they continue to lend and are sure to be saddled with large NPAs on these loans. It may not be due to any inability to pay as much as an unwillingness to do so. Household savings get used for education, health/medi-care, old age security and, of course, for major events such as marriage. In that context it is important that adequate avenues are provided for poorer segments to pursue higher education without destabilising the asset-liability management system of the banking sector. This is a major challenge for the policy planners as sustaining quality education at lower cost may not be a viable option in the context of increased use of technology in higher education. The Government may not be able to provide substantial subsidy for higher education unlike in the past. Hence, commercial banks should play a more active role in enhancing the skills and educational competence of large sections of the younger and potential work force. This becomes especially crucial in the context of the ever-growing demands of such emerging sectors as IT. Blue-collar workers, such as carpenters, plumbers, mechanics, painters, masons, or drivers, also need skill enhancement and bank loans can be useful for them to pursue training. Banks have to walk the tightrope in meeting the educational loan requirements of all these sections and at the same time minimise the risks associated with increased NPA in this sector.

The sustainable model It may be appropriate to re-look the whole issue and create a sustainable model and re-engineer the entire educational sector as in the case of the housing sector. The Finance Ministry should create an Educational Finance Corporation on the lines of Housing Finance Corporations. This corporation can be co-promoted by a group of financial institutions with a corpus of at least Rs 500 crore. It should be manned by people who know well educational institutions, courses, opportunities and job prospects. It should create a national register of educational institutions detailing the courses and facilities offered and the fee structure. It must 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 to the bank. Some thing like tax deduction at source. The employment application should have a column to collect information regarding the educational loan status of the prospective employee. The employer can be any entity in public or private sector, a cooperative, or a partnership firm. The onus is on the employer to deduct the EMI from the pay of the employee and remit it 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. The passport should also have a page on the loan status of the person and if he has taken an educational loan then immigration clearance should be mandatory and given only on clearing the loan. These steps require amendments to rules and regulations of various laws. But it is required to look at the issue as one of enhancing the opportunities available to all sections to enhance skill formation and pursue higher education since education by definition is a great equaliser. Education loan is an investment in the inter-generational sense and hence pointed policy formulations are urgently required in this sector. (The author is Professor of Finance, Indian Institute of Management-Bangalore, and can be contacted at vaidya@iimb.ernet.in. The views are personal and do not reflect that of his organisation.)