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