Pursuing higher education in India and abroad is set to become easier. The newly re-appointed Union finance minister P. Chidambaram announced that the Indian Banks’ Association (IBA, estb. 1946), of which 173 banks — including 26 public, 23 private sector, 38 foreign banks with offices in India and 61 co-operative banks as also 25 financial institutions — are members, will recommend revised norms to make it easier for students to avail education loans. Addressing the media after a meeting with chief executives of 26 public sector banks on August 18, Chidambaram said: “A bank loan is the right of every student who meets the required parameters.”

The agenda of the meeting included four issues relating to education loans — expansion, time-bound disposal of applications, education loans for students admitted under management quotas, and loans for professional diploma courses. According to IBA sources,  public sector banks (PSBs), which currently account for 80 percent of all loans disbursed annually, are devising a mechanism for rating institutions, courses and students for loan disbursement to reduce the risk of defaults.

Under current IBA guidelines, banks are prohibited to demand security for education loans of up to Rs.4 lakh. But loans of Rs.4-7.5 lakh require guarantee from third parties and loans of over Rs.7.5 lakh have to be under-written by parents obliged to ante up collateral in the form of land, buildings, government or public sector bonds, life insurance policies, bank deposits, mutual funds or gold. Moreover, the loanee student is obliged to pledge up to 50 percent of his annual income (depending on bank rules) after a moratorium of six months-one year. Among the most significant reform proposals is to extend the repayment period to ten-15 years from the current five-seven years.

Chidambaram’s student loans liberalisation initiative follows former finance minister Pranab Mukherjee (elected as President of India in July) setting up a Central Credit Guarantee Fund (CCGF) for education loans in his 2012-13 Budget speech of March 16. One percent of the interest earned from each education loan advanced by public sector banks will be contributed to swell the corpus of the fund. According to Union minister of human resource development, Kapil Sibal, the CCGF will have a corpus of Rs.5,000 crore, and discussions are on with the finance ministry to give the fund final shape.

The proposed CCGF is certain to be welcomed by the country’s estimated 173 banks and banking companies which ab initio have been reluctant to advance education loans because of the high risk of default. According to IBA data, the number of education loans increased seven-fold between 2003-04 and 2010-11. But during the same period, the outstanding loan amount increased nine-fold to Rs.43,074 crore availed by 2.23 million borrowers.

With banks’ student loan NPAs (non-performing assets) mounting, it’s hardly surprising that branch managers are reluctant to advance education loans, especially at below prime lending rates. Moreover, there’s the problem of loanees’ ability to repay against the backdrop of poor quality education dispensed by the country’s higher education system which doesn’t guarantee employability. “Low interest rates plus high risk of default do not make for a sound business model. This is why private banks seldom advance education loans. Public sector banks, on the other hand, are obliged to advance soft loans to students despite the high risk of default. That’s why they come up with all sorts of excuses to side-step this obligation. While setting up a CCGF is fine, the first priority of government should be to improve the quality of its higher education institutions so that graduates are employable and can repay their loans,” says Prof. R. Srinivasan, assistant professor (finance), Singhania Institute of Management and Technology, Gurgaon (Haryana), and co-author of a report, Analysis of Education Loans: A Case Study of National Capital Territory of Delhi.

Currently, information technology firms reject 90 percent of college graduates and 75 percent of engineers as they are not even good enough to be trained, according to a recent report by the Delhi-based National Association of Software Services Companies (NASSCOM). And in the QS World University Rankings 2011, of the world’s 400 most respected universities, not even one of India’s 603 universities or 31,000 colleges is ranked among the top 200.

Moreover to this dismal scenario, bank managers routinely factor in the absence of a tracking machinery to trace graduate loanees to recover long-term loans, and given the country’s snail-paced legal system, it’s hardly a wonder that expanding education loans portfolios is a low priority of banks.

Swati Roy (Delhi)