Needs Aggressive & amp; Constructive Approach!

“The education ministry headed by Mr. Kapil Sibal (the Ministry is called Human Resources Development but Education is under its purview) has been in the limelight following the path breaking initiatives it has proposed for not only education at the school level but also at the higher and professional level.  Still plenty needs to be done to energize this sector by increasing capacity and quality, and making it more accessible to all classes of the society.

One important element of reform in this sector will necessarily be in the area of education,loans,. We have already seen the difference that easier availability of loans can make in the housing and consumer durables sector. Education can be another sector that can benefit tremendously by easier availability of education loans.

In most countries government funded specialized institutions (such as the older version of Sallie Mae in the US or the FFSAP – Federally Funded Student Aid Program) step in to ensure that loans are available for all students who are good enough to get into any accredited educational institutions that provides higher or vocational education. The institution normally does not lend directly but provides back to back refinance (provide loans to lenders to enable them to on-lend to students) and share in the risk (write-off part of such loans if the student defaults and is unable to repay) to make sure that this vital tool to make higher education accessible to everybody.

Let’s see what actually happens in India?
Today education loans in India lack any institutional backing and suffer from the disease of good intentions.  At the best of times education loans are a risky business for the banks in any country. The typical higher education or vocation education student will take around 2-5 years to complete his education. He will need a fairly large,loan,to complete his education. Most likely he will not have any collateral security to offer for the,education loan,. In most cases his parents (or other close relatives) may be willing to stand guarantee for the due repayment of the loan but their own income may not be sufficient to repay the loan in case the student is unable to complete the course for any reason or is unable to find a job after he completes the course. In fact in a majority of cases the student’s family is not even in a position to pay the interest on the loan during the time when he is undergoing the course. They require that the interest amount also be accumulated and the repayment (of both principal and interest) begins only after the course is over and the student gets the job.

Education loans are a part of the priority sector but have no separate allocation. Also education loans cannot be priced higher than 1% above the particular bank’s PLR. Thus banks like to do the other kind of priority sector loans (loans to small transport operators, professionals etc.), which they consider less risky. In fact, the private sector banks and foreign banks who cannot be bullied by the government, have completely kept away from the sector (some of them have “education loan programs” but they all require collateral and/or guarantee from a well earning relative and interest servicing during the course period which effectively means that they service only the well heeled sections of the society). The public sector banks on the other hand are forced to show some disbursements under this head, do the minimum that they can get away with without offending the government. They naturally have restrictive rules on the type of courses as well requirement of collateral/income based guarantee for loans above Rs. 4 lacs.
,A specialized education loan institution called Credila (in which HDFC holds a significant stake)  is doing some good work in the area of education loan area though it also is restricted to the middle and richer classes as they are unable to provide loans without adequate collateral security or adequate income or both.

Loan essentials:

Education     loans above Rs. 4 lakh require tangible collateral, security for the     full value of the loan or third-party guarantee, depending on the amount.

The co-borrower  the parent or guardian – is required to furnish   his/her bank account statement, tax returns of the last two years,     statement of assets and liabilities and proof of income.

The usual     security that banks accept are National Savings Certificates (NSCs), bonds, gold, vehicle, house, property, etc.

For loan above Rs. 4 lakh and up to Rs 7.5 lakh, the collateral in the  form of a suitable third-party guarantee is required. The bank may,     at its discretion, waive third-party guarantee if satisfied with the net worth / means of the parent who is executing the document as a  joint borrower.

The loans     above Rs 7.5 lakh require collateral security of a suitable value or     a suitable third-party guarantee, along with the assignment of the     student’s future income for payment of installments.

The expenses covered:

Fees payable     to the college

School or     hostel  including
tuition     fees

Examination,     library and laboratory fees

Purchase of     books, equipment, instruments and uniforms

Caution     deposit

Building     fund

Refundable     deposit supported by the institution’s bills or receipts

Travel     expenses for studies abroad

Buying     computers essential for completion of the course

Any other     expenses needed to complete the course

Study tours,     project work and theses and

Some banks     also cover the cost of two-wheelers.

So in summary the bank is expected to lend money to a borrower without any collateral security and without sufficient current income to pay back the loan solely on the hope that the student will acquire skills good enough to get a job that will pay him enough to enable him to pay back the loan,.,So left to themselves the banks are not going to disburse significant amount of education loans except to the well-heeled who can provide collateral/guarantee.

This boils down to the fact that there will be restricted finance available for potential students even as the education sector itself is becoming diversified and more vibrant.

All this need to change & change soon! Clearly the government needs to step in and fullfil the promise made by the finance minister 5 years ago to set up a education guarantee fund that will provide refinance for education loans as well as share in the credit risk that is inherent in this product. Afterall  in education loans interest rates are not that big a consideration whereas availability and the timeliness are essential. This is what the long delayed education guarantee fund can provide.,”

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