Friday, July 08, 2011

Public sector banks turning cautious on education loans

Public sector banks are turning cautious in handing out education loans as some of their earlier grants to the sector have turned sticky. This is even as the loan exposure of public sector banks for education has been on the rise and touched a level of Rs. 430.74 billion in end March 2011 from Rs. 45.50 billion in March-end 2010.

Although the number of education loan accounts is on the rise, the year-on-year growth rate has been showing a declining trend in number of accounts as well as in the amount. Bankers attribute slower growth partly to the fact that loans handed out between 2003 and 2005 are now being repaid. Education loan tenures have been around four to five years, and there is also a year's moratorium for repayment.

But bankers equally admit to reluctance in making loans now — unlike in the past when they aggressively sought out students as well as parents. Bankers admit to problems in recovery, especially for education loans up to Rs. 400,000 on which the borrowers are not required to provide margin money or security.

“Our estimates are that 10-15 per cent of the outstanding loans to the sector may have turned bad, with the bulk of it in the sub-Rs. 400,000 size,” a top official from a leading public-sector bank told Business Line. The gamut of issues around education loans and the public sector's performance related to them will come up for discussion at the Finance Minister, Mr. Pranab Mukherkee's meeting with chief executives of public sector banks on Friday.

At the meeting, the chief executives of the banks are expected to present the progress on the implementation of education loan schemes and constraints, if any, in expanding coverage under the scheme. The Indian Banks Association had prepared a model educational-loan scheme in the year 2001, which was circulated to banks for implementation by the Reserve Bank of India in April 2001.

This scheme was subsequently modified in 2004 and guidelines for the revised model educational-loan scheme were issued in August 2004 by the association. Based on recommendations of a working group and suggestions from the Government, the scheme was again modified in 2007-08. The association had recently proposed modifications in the education loan scheme and the revision is likely to be finalised shortly.

Source: The Hindu Business Line, July 8, 2011
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