Tuesday, April 12, 2011

Education loan norms to be reworked to cut bad debt

Millions of students seeking bank loans for higher studies and professional courses may soon get more time to repay after finding a job, but those who don't have sufficient academic credentials and are getting admission through other means such as donation and "quotas" may find it tough to get money from banks. Concerned over a rise in default rates in loans given to students, Indian banks are re-working the existing norms to give such advances.

The Indian Banks' Association (IBA), the industry lobby of lenders, has constituted an expert committee under Indian Bank Chairman & Managing Director T.M. Bhasin to modify the so-called education loan scheme. This scheme was launched in 2001-02 by the then finance minister Yashwant Sinha in a budget announcement. It was later modified in 2004-05, when P. Chidambaram was the finance minister. "Since banks are not allowed to ask security for loans (of) up to Rs. 400,000 under the current scheme, there is a problem in the business. Some of the students are not getting jobs. What we, therefore, intend to do is track students' progress. There is some extension required (for repayment)," Bhasin said.

The committee, which is expected to submit its report by the end of this month, is planning to make some sort of security mandatory for loans given to those students who are securing admissions not by merit, but through recommendations or hefty donations. The committee is also expected to plug the loopholes in the loan sanctioning process. Often banks are compelled to give loans to students under pressure from politicians and people of influence in rural and semi-urban pockets even when they are not fully convinced about the credentials of the students, according a member of the Bhasin panel. "A student typically pays more money when the ad- mission is not through merit alone and in such cases banks might ask for some security," the member said. He did not want to be named as the panel is yet to finalize its report.

Bankers blame the practice in many private colleges, particularly in south India, to "auction" seats to students who are not otherwise eligible for admission, for the rising non-performing assets (NPAs) in their education loan portfolios. Such students often fail to find a job on completion of their course and hence cannot repay bank loans, leading to defaults. According to the latest Reserve Bank data, Indian banks' education loans outstanding rose to Rs. 43,801 crore (Rs. 438.01 billion) as on February-end, up 19.93%, from Rs. 36,522 crore (Rs. 365.22 billion) in the same period last year. Around 1-3% of such loans are NPAs, with the actual percentage varying from bank to bank. The committee is likely to extend the repayment period of education loans from five-seven years now to up to 10 years to facilitate repayment and reduce the probability of default, the member quoted above said.

Typically, banks lend to students at 10-11% for a tenure of five-seven years. Under the current norms, banks cannot accept any security for loans up to Rs. 400,000. For loans between Rs. 400,000 and Rs. 750,000, they can ask for personal guarantees from any working individual. For loans of even higher amount, collateral is necessary. Loans to students have grown by a healthy 20% in the last few years. State Bank of India has the largest share of education loans: Rs. 11,000 crore (Rs. 110 billion), or around 25% of the outstanding portfolio of the industry. Once the guidelines are finalized, IBA will notify the new norms. K.R. Kamath, Chairman & Managing Director of Punjab National Bank (PNB), said his bank has not seen any alarming rate of NPAs from its education loan portfolio. "Funding education should be a top priority of Indian banks as access to proper education is the only way for the middle class population to come up in society," Kamath said.

Education loans contribute 1.5% of PNB's total loan book of Rs. 2.21 trillion in December. Ashvini Patil, Senior Manager (Banking Division) at rating agency Credit Analysis and Research Ltd., said majority of the NPAs in education loans happen for loans below Rs. 400,000, where no collateral is required. "Some of the banks are facing problem of NPAs emanating from education loans as students fail to repay. This happens primarily in the less than Rs. 400,000 category, where no collateral is required," Patil said. But since education loans do not form a huge portion of banks' overall loan portfolio, as a percentage of total NPAs they don't pose a major threat, he added.

Source: Mint, April 12, 2011

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