Delhi: Student loan hurdles

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…