New Hope for Education Loans

July, 7, 2015

A proposal in the Union Budget 2015-16 to establish a Student Financial Aid Authority to administer and monitor scholarships and education loans, offers the prospect of revitalising the country’s malfunctioning high-interest education loans system - Summiya Yasmeen

Gurgaon-based Meghana Sathyanarayan, communications officer of CottonConnect, a UK-based NGO, is grateful to two public sector banks for fulfilling her higher education dreams. In 2010, the nationalised State Bank of Mysore loaned her Rs.3 lakh to help fund her undergraduate media degree at Jain University, Bangalore and later in 2013, the public sector Corporation Bank advanced her an education term loan of Rs.15 lakh repayable over 10 years to finance her Masters in corporate social responsibility at Nottingham University, UK. "Though the paperwork was cumbersome, without these bank loans, I wouldn’t have been able to finance my higher education," she says.

Meghana is one of the fortunate 2.6 million students in higher education who met the stringent eligibility criteria stipulated by the country’s 26 public sector and 23 private banks for advancing education loans. Over the past 15 years, following a sympathetic-to-education Union Budget 2001 which directed the Reserve Bank of India (RBI) to issue guidelines to the country’s public sector banks to disburse education loans, the number of student loanees has increased significantly. Education loans disbursed by the country’s banks rose from Rs.15,000 crore in 2007 to Rs.70,000 crore in 2014.

Yet despite the steady growth of education advances over the past decade, given the onerous terms and conditions under which study loans are sanctioned, less than 10 percent of the 30 million youth enrolled in institutions of higher education in India avail of them. Against this, 79 percent of students in higher education in the UK and 71 percent in the US fund their education by way of long-term loans.

Moreover, according to Union ministry of finance data, there’s a decline in the growth rate of education loans disbursed by public sector banks (PSBs), which advance over 90 percent of all credit in India. While education loans sanctioned grew by over 17 percent in 2011, the growth rate fell to 13.6 percent in 2012 and 9 percent in 2013, even as the outstanding balance in study loans advanced increased to over Rs.50,000 crore from Rs.35,000 crore in the same time period. As of February 2015, banks had a total outstanding of Rs.63,500 crore due as education loans, according to the RBI. Non-Performing Assets (NPAs) in the education loans portfolios of public and private banks range between 5-9 percent, against the average NPA rate of 4.5 percent of all loans advanced.

With dissatisfaction over tardy disbursement of education loans becoming increasingly vocal, in the Union Budget 2015-16 presented to Parliament on February 28, finance minister Arun Jaitley announced an apex-level authority to administer and monitor education loans and scholarship schemes. "With a view to enabling all poor and middle class students to pursue higher education of their choice without any constraint of funds, I propose to set up a fully IT-based Student Financial Aid Authority to administer and monitor scholarship as well as educational loan schemes, through the Pradhan Mantri Vidya Lakshmi Karyakram (prime minister’s education fund programme). We will ensure that no student misses out on higher education for lack of funds," said Jaitley in his 94-minute budget speech. Further and better particulars of the Student Financial Aid Authority (SFAA) — composition, aims and objectives, and process — are yet to be announced by the finance ministry.

The BJP-led NDA government’s SFAA proposal has been widely welcomed by educationists, students and parents. Even though the Indian Banks Association (IBA) has released two model education loan schemes ‐ first in 2001 and subsequently in 2012 ‐ simplifying student loan processes and procedures, the nation’s paper-intensive public sector banks continue to make the education loan disbursement process an obstacles race for students.

"With almost all nationalised banks disregarding the simplified guidelines recommended by RBI and IBA, the proposed SFAA is overdue and welcome. Banks are reluctant to give priority to education lending since repayment starts only after completion of studies. Therefore they burden applicants with cumbersome paperwork, and stipulate stringent repayment terms to discourage them. For example, though the IBA stipulates 10-15 years of flexible and telescopic repayment under which equated monthly (repayment) instalments are gradually increased, most bank managers demand huge EMIs in the first three-five years. They also resort to naming and shaming young students who delay EMIs. One hopes SFAA will closely regulate rogue banks and ensure they adhere to RBI’s education lending guidelines," says K. Srinivasan, a former banker and currently the Chennai-based convenor of Education Loan Task Force (ELTF), a voluntary organisation which generates awareness about student loans.

Adds Dr. Ashima Goyal, professor of economics at the Indira Gandhi Institute for Development Research, Mumbai: "Awareness about the documentation required for availing education loans is low. This makes it easy for bank managements to deny students government subsidies by discouraging them with excessive paperwork. The proposed fully IT-driven SFAA will make information more easily available, and the loans disbursement process smoother. It will help establish student identities, bona fide needs, and credit histories. In turn, this will make it easier for students to avail government schemes such as lengthening of repayment terms, as well as incentives for repayment."

The proposed SFAA is not the first effort of the Central government to make education credit more accessible to students. With the Centre having set a gross tertiary education enrolment target of 30 percent by 2020 (against 19 percent currently), and institutions of higher education particularly in the private sector raising tuition fees sharply, successive administrations in New Delhi have become aware of the logic — and necessity ‐ of opening up the sluice-gates of student credit for higher education.

But in 2009, the Congress-led UPA-II government introduced an interest-waiver scheme for students from economically weaker sections (EWS) with incomes less than Rs.4.5 lakh a year, during the tenure of their studies. Public sector banks claimed Rs.3,913 crore from the Central government on account of the loan waiver scheme, yet the government has reimbursed only a part thereof. In a letter to a student, the Indian Overseas Bank confirmed that the government settled only 44 percent of its claims in 2013-14. However, in 2014 after the BJP-led NDA government was elected to the Centre, the Union HRD ministry has restricted the interest-waiver facility to scheduled castes/tribes students.

With the withdrawal of interest-waiver schemes periodically, and rising NPAs against student loans, there’s growing clamour from PSBs that the Central government fulfil its long-pending promise of establishing a Higher Education Credit Guarantee Fund (HECGF). In 2012, then finance minister Pranab Mukherjee of the UPA-II government mooted the idea of an HECGF in Union Budget 2012-13. But since then, it has remained a promise.

However, according to a recent news report (Mint, April 24), the BJP-led NDA government has drawn up a proposal to establish a Higher Education Credit Guarantee Fund to provide sureties to banks against loans advanced to students for higher education. The fund will have an authorised corpus of Rs.3,500 crore but will start operations with Rs.500 crore this fiscal year, and will underwrite unsecured education loans of up to Rs.7.5 lakh. Under the scheme, banks are required to deposit 1 percent of every student loan advanced into this fund. If after the moratorium period ‐ one year after the end of studies or six months after getting a job, whichever is earlier ‐ a student doesn’t begin repayment, 50 percent of the credit amount advanced will be paid to the lender bank. The remaining 25 percent will be paid after a certain period of time, during which the bank may initiate legal action against the borrower.

Yet even as the Union government is figuring out ways and means to loosen banks’ purse strings, the IBA is advising its 201 members to be cautious and stringent. In its Revised Model Educational Loan Scheme 2012 and subsequent circulars, IBA advises banks to grant loans to "meritorious" rather than deserving students admitted into 1,100 approved higher education institutions countrywide.

The maximum loan recommended by RBI/IBA for study in India is Rs.10 lakh, and Rs.20 lakh for study abroad. Loans of less than Rs.4 lakh require no collateral but a parent as joint borrower. For loans of Rs.4-7.5 lakh, parents are listed as co-borrowers, and third party guarantee is required. For loans above Rs.7.5 lakh, collateral is mandatory. The moratorium period before repayment commences is duration of the study programme plus one year or six months after getting a job, whichever is earlier (see box p.80).

But although the RBI and Union finance ministry have drawn up frameworks and guidelines for easing disbursement of education loans, there’s sufficient discretionary power vested in public sector bank managers to modify and alter the terms and conditions of education loans. According to the Chennai-based Education Loan Task Force, even though loans below Rs.7.5 lakh don’t require collateral, most banks insist on deposit of equity shares, bonds, life insurance policies, etc, while for loans above Rs.7.5 lakh, high-value real estate needs to be pledged. And given that in the capital-starved Indian economy, prime lending rates are 12-15 percent, interest charges on ’concessional’ education loans range between 11.6-13.3 percent per year. In effect, this means a student borrower has to pay back double the amount borrowed, and unlike the situation in western countries where repayment periods stretch to 25-30 years, the maximum repayment period in India is 15 years.

Moreover, banks calibrate interest rates according to institutes’ reputation with those admitted into highly ranked institutions offered lower rates of interest. For instance, the State Bank of India (SBI), the country’s largest bank with 15,869 branches and five associate banks nationwide, offers its low-interest (9.95 percent cf. average rate of 11.60-13.35 percent) Scholar loans only to students admitted into 93 top-ranked higher ed institutions (IIMs, IITs, etc).

"The reluctance of banks to sanction loans seems to be less driven by objective analysis of risk, than an entrenched belief that student loans are not commercially attractive. Even when students meet all eligibility criteria, banks often reject their applications on flimsy technical grounds. For instance, even though one of our recent graduates had a job offer letter from Fab India at an impressive salary of Rs.70,000 per month, he was unable to secure a loan to pay for his final year tuition. It is difficult to understand how a bank can refuse a student with a confirmed job offer a loan which would require him to repay Rs.8,000-12,000 per month," says R. Sudarshan, dean of the Jindal School of Government and Public Policy at O.P. Jindal Global University, Sonipat (estb.2009), ranked among the country’s Top 50 varsities in the EW India University Rankings 2015.

Chandramouleshwaran, special assistant at State Bank of India, Indiranagar, Bangalore, denies that PSBs are wary of education loans. "The RBI has categorised education lending as a high priority sector, and we are very flexible and prompt in sanctioning education loans. Last year this branch cleared all 14 student loan applications we received, and lent Rs.4 crore. However, if the government wants to increase penetration of student loans, it must revise its education loans policy. For the past seven years, the limit of Rs.7.5 lakh for loans without collateral has not been raised, even as tuition fees in most premier higher education institutions have been increasing year on year. Under RBI guidelines, a student cannot avail an education loan above Rs.7.5 lakh without collateral security. Even in cases where families from lower-economic strata own property, because it doesn’t satisfy bank rules we cannot consider it as collateral," he says.

Nevertheless, SBI is the country’s most liberal bank in terms of student loans. Thus far it has disbursed Rs.15,295 crore to 577,000 students. It is followed by Canara Bank which has an education loans portfolio of Rs.5,371 crore. Altogether, the country’s 26 public sector banks have advanced an aggregate Rs.61,177 crore as education loans against the mere Rs.9,298 crore by private banks.

While public sector banks, which were nationalised in 1969 to subserve the broader public interest, are obliged to advance education loans, the country’s 23 private and 43 foreign banks face no such compulsion. In a socio-economic environment where for ideological reasons, creditors’ rights are often ignored and the justice system is snail-paced, private banks which cannot expect government bailouts for ’recapitalisation’ that are de rigueur for PSBs, are understandably wary about expanding their student loan portfolios.

The cautious bordering on paranoia approach of banks to student loans has a deep correlation with the perceived — and real — inability of the vast majority of ill-qualified graduates produced by India’s colleges and universities to secure well-paying jobs and consequently pay back. Even as the country's higher education system has rapidly expanded from 280 universities and 10,800 colleges in 2001 to 719 universities and 35,000 colleges currently, expansion has been at the cost of quality.

A 2014 study conducted by the Federation of Indian Chambers of Commerce and Industry (FICCI) and Ernst & Young, reports that although India produces over 8 million college graduates annually, only a small proportion of them are employable.

Likewise, the National Employability Report 2014 released by the Gurgaon-based Aspiring Minds found that only 18 percent of engineering graduates actually land well-paid jobs. Moreover, entry-level salaries (Rs.20,000-30,000 per month) have registered slow growth in a sluggish economy over the past three years.

Comments Sanjana Chowhan, a recent graduate of the Columbia Journalism School, USA, who borrowed Rs.70 lakh from Vijaya Bank to fund her foreign education: "Even though tuition fees are constantly rising, higher fees have not resulted in better paying jobs. Timely repayment of education loans is particularly difficult for students who borrow heavily to fund a foreign degree, and return to India to work in a low-wage economy."

The obvious disinterest of private banks and officially forced interest of nationalised banks in the high potential education loans market, is also connected with India’s chronically malfunctioning judicial system, characterised by archaic procedural laws and agonising delays which make debt recovery within a reasonable time frame almost impossible. Disrespect for creditors’ rights and ill-defined debt recovery procedures are major reasons why prudent private banks don’t have much time for developing the education loans market. This phenomenon of the law’s interminable delay also explains the insistence upon collateral security and co-guarantors for every student loan.

Particularly for students in rural India, the insistence of banks on collateral security is a major roadblock to accessing education credit. Moreover most nationalised banks don’t accept agricultural land as collateral, because state governments across the country have imposed numerous restrictions on the sale and mortgage of agricultural land. Quite unfairly and without protest from academia and the intelligentsia, unwarranted state paternalism shuts out rural students from the education loans market.

With even nationalised banks unsympathetic to bottom-of-the-pyramid rural families, thousands of meritorious students in the poor hinterland are cruelly excluded from the tertiary education system. The sad situation of hard-working, meritorious students from rural households is highlighted by the widely reported story of Raju and Brijesh, children of a daily wage earner, who against overwhelming odds cracked the IIT-JEE (joint entrance exam), reportedly the world’s toughest public entrance exam written by 1.3 million students countrywide annually, of whom a mere 0.7 percent are admitted into the 16 Central government promoted Indian Institutes of Technology. The two former Jawahar Navodaya Vidyalaya (JNV), Pratapgarh students were unable to pay the admission (Rs.30,000) and first semester fee (Rs.20,000) because of the extreme poverty of their parents (see p.22).

Predictably, the story of the Pratapgarh brothers aroused a national outcry which prompted HRD minister Smriti Irani to waive their tuition fees, and UP chief minister Akhilesh Yadav to offer to fund their entire study expenses. But such ad hoc largesse on a case-by-case basis doesn't address the endemic problem of thousands of EWS students in rural and urban India being denied education because they are unable to raise modest term loans.

The failure — perhaps deliberate because there’s persistently inadequate public investment in higher education (1-1.5 percent of GDP), and discouragement of private investment in education capacity creation — of successive governments at the Centre and in the states to implement a fair and workable national student loans programme even 68 years after independence, has resulted in the pathetically low penetration of education loans. Shockingly, they have learned no lessons from Western countries which have developed excellent government-supported student loans programmes.

A case in point is the US where over 60 percent of college students avail subsidised loans through the US department of education's Federal Student Aid office. All students admitted into an undergraduate degree programme in a US college/university qualify for the federal government’s Stafford/Perkins loans which are advanced directly to students (no co-borrowers required) irrespective of prior credit history, at below-market interest rates ranging between 4.66-6.21 percent and repayment period up to 25 years. In addition, students can access loans from private banks which generously advance education credit.

In the UK as well, all students admitted into university are eligible for loans up to £9,000 (Rs.9 lakh) per year, to cover their entire tuition fees and maintenance grants advanced through the government-promoted Student Loans Company. Interest rates range between 1.5-5.5 percent with the repayment period extending to 30 years.

"The plain truth is that education — particularly higher education — is not a priority of all governments in India. There is much rhetoric about educating and improving the employability of Indian youth, but there’s no roadmap on how to achieve it.Therefore the proposal to establish a Student Financial Aid Authority is welcome. However, this initiative is contradicted by a 16.5 percent cut for education in Union Budget 2015-16. Without funds, no scheme can work. Moreover, the government erroneously seems to believe that over-subsidisation of higher education is the way to provide students from economically weaker sections access to education, and that merit should be the major criterion for awarding scholarships and loans. What we call merit is often reflected in parents’ ability to sign up their children for coaching classes. It’s time the government re-examines its universal subsidisation of higher education, and develops a transparent loans programme which every deserving and not just meritorious, student in India can avail," says Dr. Suman K. Mukerjee, principal and dean of the Bharatiya Vidya Bhavan Institute of Management Sciences, Kolkata.

Meanwhile, with the Central government yet to commit resources to the national Student Financial Aid Authority even as enthusiasm within the country’s major public sector banks for education loans is waning, a growing number of non-banking financial companies (NBFCs) are entering the student loans market. A case in point is HDFC Credila Financial Services Pvt. Ltd, a company founded in 2006 with the prime objective of funding students in higher education. With HDFC Bank — India’s largest private sector bank — owning a majority stake in Credila, over the past decade, it has disbursed Rs.2,300 crore to Indian students enrolled in over 2,100 institutes of higher education in 35 countries.

"Expenditure on children’s education is one of the biggest components of middle class household budgets in India. There are about 25 million students in the Indian higher education system, and 150,000 students from India venture abroad every year for higher study. With our careful credit appraisal systems, deep study of the education sector, superior underwriting capabilities, ability to rank courses and higher education institutions, excellent servicing, and country specific customisation, we have been able to ensure that Credila’s NPAs are only 0.05 percent of advances. With GDP growth picking up and well-paid jobs becoming increasingly available, the business of advancing education loans can become profitable. Moreover, the government’s plan to roll out a higher education loan guarantee scheme will motivate banks to scale up their education loan portfolios," says Ajay Bohora, co-founder & CEO of Credila.

With the Indian economy slated to grow at a projected 7 percent per year for the next decade, industry demand for skilled employees and well-educated graduates is certain to rise. And as colleges and universities raise their fees to upgrade facilities and standards, the demand for education loans is set to grow exponentially. Therefore it’s incumbent upon the Central and state governments to devise viable and self-sustaining education loan schemes which fund not just the middle class, but also promising youth from underprivileged households. Against this backdrop, the proposal of the one-year-old BJP-led NDA government to introduce a Higher Education Credit Guarantee Fund which will underwrite student loans, is an important first step.

"We need a government-supported national student loans programme which makes it mandatory for public sector banks to advance credit to all deserving students admitted into recognised colleges and universities. It’s also a good idea for the Central government to set up a refinance bank for education loans on the lines of National Bank for Agricultural and Rural Development (NABARD) and Industrial Development Bank of India (IDBI), so that banks obtain refinance at lower rates of interest which can be passed on to students," says K. Srinivasan, convenor of ELTF.

However, guaranteeing loans advanced by PSBs and private banks doesn’t absolve them of their obligation to adhere to prudent banking practices — creditworthiness of applicants, repayment capability etc. Therefore, education loans are unlikely to be doled out liberally. Instead, it makes much more sense for the proposed SFAA to be established as a separate credit assessment, lending and loans recovery organisation with an independent corpus initially capitalised by the Central and state governments, with corporates given tax breaks for grants and donations to the authority. The promotion of an autonomous organisation for the purpose of advancing, management and recovery of student loans is a self-evidently more effective option to forcing commercial banks to advance student loans at concessional rates of interest.

With a mere 19 percent of the country’s youth in the age group 18-23 years enrolled in institutions of higher education (cf. 80 percent in the US), and less than 10 percent availing education loans, the case for a government-funded student loans and recovery organisation is compelling. But for this to materialise, the BJP-led NDA government needs to fulfil its 2014 election manifesto promise of doubling expenditure on education from the current 3.8 percent to 6 percent of GDP, and higher education spending from 1 to 2 percent of GDP.

Simultaneously the country’s 719 universities and 35,000 colleges need to be permitted to charge market-driven tuition fees to sharply upgrade facilities and curriculums to enhance the employability of students and consequently their creditworthiness and repayment capability. A transparent, accessible and viable student loans ecosystem is the prerequisite of upgradation and universalisation of tertiary education.

Source : Education World Online