Wednesday, July 20, 2011

Government seeks more clarity on education loans

The Ministry of Finance wants state-owned banks to define the terms and conditions for sanctioning education loans in an effort to reduce arbitrary decisions by bank officials. In draft guidelines circulated to the banks last week, the government has suggested steps to make the process of sanctioning and disbursing education loans more transparent, customer friendly and standardized.

A finance ministry official who did not want to be identified said the current system is heavily dependant on the discretion of the branch manager of the bank. The ministry wants “approval conditions” defined so as to reduce this discretion, this person added. Bankers said the government also wants to ensure students understand the terms of the loan contract. “It is clearly in banks’ interests also if the student understands the terms and conditions well. It will help banks reduce the NPAs (non-performing assets) in this segment,” said Vivek Mhatre, General Manager in-charge of retail banking at Union Bank of India.

The education loan portfolio of public sector banks stood at Rs. 43,074 crore (Rs. 430.74 billion) on 31 March. Bankers say defaults in this segment are 2-5% of the portfolio. Defaults are higher in loans of less than Rs. 400,000, where banks cannot ask for collateral or personal guarantees.

The ministry has proposed that banks give loan applicants the name of a bank executive they can approach to track the status of their application. It has also asked banks to tell applicants how much money they can borrow to meet additional expenses besides the tuition fee.

Students generally take a student loan to pay tuition fees and meet additional expenses such as hostel fees, books, laptops and field visits. Banks transfer the tuition fees directly to the institutes but release the additional expenditure to the students.

“They (banks) can clearly state that the additional expenses ceiling will be a certain percentage of the tuition fees, say 50%,” the ministry official said. “At present, it is left to the discretion of every bank manager who may sometimes feel that the student is overstating the additional expenses. Each bank can decide its own limit.”

The ministry has suggested that bank branches compile the placement track record of institutes in their area and consider that as the basis for approving student loans.

“A bank branch can compile the placement data of colleges in that particular area to determine the loan paying capacity of the borrower. This will ensure that there is no discrimination between students from the same college—where one is given a loan and the other is not,” the ministry official said. “This is particularly so in loan applications below Rs.4 lakh, where the borrower does not need to give any collateral.”

The ministry has also asked banks to clearly state that a loan taken during the so-called moratorium period will be classified as a second education loan. Banks typically let students complete their course and take a year to get a job before they start repaying the loan—this is known as the moratorium period.

Currently, a second loan is defined as a loan taken immediately after the first loan, but the ministry official said the interpretation of “immediately” can vary depending on the discretion of a bank official.

The ministry’s move follows a report submitted by a committee constituted by Indian Banks’ Association (IBA) to suggest modifications in the model education loan scheme launched in 2001-02.

The committee, headed by Indian Bank chairman and managing director T.M. Bhasin, has recommended the creation of a credit guarantee fund financed by the banks and the government. Banks can use this fund to recover losses from bad education loans.

The ministry official quoted above said the government is open to the creation of a credit guarantee fund and has asked IBA for a detailed proposal.

Source: Mint, July 20, 2011
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