Education Loan and Inclusive Growth : India in a Comparative Perspective [1 ed.] 9781443854320, 9781443847193

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Education Loan and Inclusive Growth

Education Loan and Inclusive Growth: India in a Comparative Perspective

By

Jacob John

Education Loan and Inclusive Growth: India in a Comparative Perspective, by Jacob John This book first published 2013 Cambridge Scholars Publishing 12 Back Chapman Street, Newcastle upon Tyne, NE6 2XX, UK British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Copyright © 2013 by Jacob John All rights for this book reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright owner. ISBN (10): 1-4438-4719-4, ISBN (13): 978-1-4438-4719-3

TABLE OF CONTENTS

List of Illustrations ................................................................................................. vii List of Tables .......................................................................................................... ix Preface..................................................................................................................... xi Foreword ............................................................................................................... xiii Introductory Note ....................................................................................................xv List of Abbreviations............................................................................................ xvii Chapter One ............................................................................................................. 1 Education Loan as an Emerging Alternate Source of Financing Higher Education Chapter Two ............................................................................................................19 Education Loan System: Significance and Existing Models in Select Countries Chapter Three ..........................................................................................................27 Trends and Issues of Operation of Education Loan in India: A Case Study of a Developing Country Chapter Four ...........................................................................................................63 Socio-Economic Analysis of Education Loans in India and its Applicability to Developing Countries Chapter Five ............................................................................................................95 Education Loan for Inclusive Growth in India and Other Developing Countries: A Way Forward References .............................................................................................................107

LIST OF ILLUSTRATIONS

Fig. 3.1 Fig. 4.1 Fig. 4.2 Fig. 4.3 Fig. 4.4 Fig. 4.5 Fig. 4.6 Fig. 4.7 Fig. 4.8 Fig. 4.9 Fig. 4.10 Fig. 4.11

Box. 3.1 Box. 4.1 Box. 4.2 Box. 4.3 Box. 4.4

Disbursal of student loans by PSU banks in India: 2005–08 Disbursal of Loan: Course Pattern Education Loan: Gender Pattern Non-repayment of Loan: Reasons Education Loan: Employment Pattern Education Loan Takers: Caste Category Education Loan Takers: Religious Category Education Loan Beneficiaries: Average Monthly Income of Families Employed Education Loan Beneficiaries: Average Monthly Income Size of Student Loan Education Loan Disbursal: Private and Public Sector Banks Education Loan Beneficiaries: Type of Educational Institutions SLBC Meeting: Opinion of Government Representative vs Banks’ Interest Discrimination of Poor Students Misuse of Education Loan Loan Amount Based on Fees in Government Institutions: Students’ Problems in Private Nursing Schools in Karnataka Education Loan: Impact of Global Economic Crisis and Relief for Students

LIST OF TABLES

Table 1.1 Table 1.2 Table 1.3 Table 1.4 Table 1.5 Table 1.6 Table 3.1 Table 3.2 Table 3.3 Table 3.4 Table 3.5 Table 3.6 Table 3.7 Table 3.8 Table 3.9 Table 3.10 Table 4.1 Table 4.2 Table 4.3 Table 4.4 Table 4.5 Table 4.6 Table 4.7 Table 4.8 Table 4.9 Table 4.10

Multi-stage Sampling: Selection of States Multi-stage Sampling: Selection of Districts Sample Selection: Distribution of Student and Non-student Categories Sample Selection: Details of Students from Four States Sample Selection: Details of Non-students Category from Four States Issues and experiences Covered under Case Studies Source of Financing Private Education Cost: Share of Education Loan Education Loan Scheme of Corporation Bank: Amount, Margin and Security Education Loan Scheme of SBI: Guarantee and Security South Indian Bank’s VitjnanPradhan Education Loan Scheme: Eligible Courses and the Amount of Loan South Indian Bank’s Excellence Educational Loan Scheme: List of Eligible Educational Institutions NPA Position of South Indian Bank: Educational Loans as on March 2008 Half Yearly Disbursal of Education Loans by 27 PSU Banks: Select States (April–September 2008) Education Loans by Andhra Bank State Bank of Travancore: Education Loan Interest Rate with effect from 10 November 2011 Rate of Interest of Select Banks on Education Loan in 2012 Disbursal of Loan: Course Pattern (%) Sanctioning of Loan: Criteria Education Loan: Repayment Pattern (%) Non-repayment of Loan: Reasons Education Loan: Employment Pattern Education Loan Takers: Education Qualification of Parents Occupation of Parents: Education Loan Takers Education Loan Beneficiaries: Parental Income: Non-monetary Indicators Education Loan Beneficiaries Case Studies: Characteristics and Issues

PREFACE

Higher education sector in most developing countries faces a major crisis of funding as we move into the 21st century. This crisis threatens the fundamental right of a person to higher education. A paradigm shift in the pattern of funding of higher education is urgently needed. Education loan can be popularized as an alternate source of funding of higher education. The book has five chapters. The first one is an introduction which talks about equity issues in higher education and the relevance of education loan in India, a developing country. In the second chapter I discuss the distinguishing features of educational loan schemes of select countries in a comparative perspective. There are wide variations among countries in respect of administration of education loan. These disparities are mainly in respect of targeting of the loan programme and loan recovery. From the experiences of different countries, four different models of education loan schemes can be drawn: (1) education loan: government guarantee to commercial bank, (2) education loan: government direct lending, (3) education loan: outsourced with core public management and (4) education loan: loan repayment integrated with the taxation system. The Indian model of student loan is in an evolutionary stage. However, the Indian education loan system has similarities with Model 1 that provides a guarantee of repayment of student loan to the commercial bank by the government. As a case study of a developing country, the salient features of education loan in India with special reference to procedures for availing education loan, student loan schemes of select banks and operational issues of its implementation are discussed in the third chapter. In the fourth chapter various socio-economic impacts of education loan are discussed in detail. Using the field survey data, it is examined whether the education loan facility reaches target beneficiaries or not, and whether banks are insensitive to the needs of the poor students or not. The role of loan mechanism in promoting the inclusion of excluded communities and minorities in availing higher education is focused on. In fact these education loan models do not provide any perfect system. Indeed a perfect system of education loan has not yet been developed in any country. An optimum model of an education loan system fitting to a country needs to be formulated considering its socio-economic and educational conditions. Fourteen case studies of various types of loan

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Preface

beneficiaries in India are also covered in the fourth chapter. These cases explain specific issues and experiences related to foreign education loan, recognition of a professional institute in availing loan, premature closure of loan during the period of study and poor/low income family’s difficulties in availing education loan, repayment of education loan and job insecurity, suicide of a student due to denial of education loan by commercial banks, and denial of education loan by commercial banks and subsequent judicial interventions. Some of the case studies also provide insight into the risk factors as perceived by the lenders. The last chapter provides a summary of the findings of the study along with a brief reflection on the relevance of the Indian experience to developing countries. This book derives in large part from the insights contained in my study on education loan in India sponsored by National University of Educational Planning and Administration, Delhi. Throughout the process of writing this book, many individuals have taken time out to help me. First and foremost, I would like to thank my wife, Dr. Mercy Jacob, who is also Associate Professor, Sri Venkateswara College, University of Delhi, for encouraging me to complete the task of writing this book. She has been my inspiration and motivation for continuing to improve my knowledge and move my career forward. I dedicate this book to her. My daughter Megha Jacob, a post graduate student of Madras School of Economics, has helped me in improving the quality of the book by giving constructive suggestions. I am indebted to Dr. N. J. Kurian, President, KDS–Delhi, for his constant support and valuable advice in writing this book. I would like to express my deep gratitude to Professor R. Govinda, Vice Chancellor, National University of Educational Planning and Administration, for writing the foreword to this book. I express deep gratitude to members of the Governing Body of KDS–Delhi for encouraging me to initiate work in this area of research. I have interacted with officials of various commercial banks, a cross section of students and parents and officials of government agencies and educational institutions for collecting data and eliciting information for this book. Special thanks to all of them. Research support provided by Ms. Seema Chelat and Mr. Sreejith P. S. is gratefully acknowledged. Dr. Jacob John

FOREWORD

Higher education in India has been growing at a fast pace in recent years, partly fuelled by increasing school completion rates and partly by rising aspirations. However, liberalization of the economy has made it difficult to find public resources that match the increasing demand for expansion and quality improvement of the system. There is indeed a fear that inept handling of higher education financing may seriously derail the economic growth process. The 12th Five Year Plan proposes to at least double the level of gross enrolment in higher education in the country, keeping expansion with equity and excellence as the overall vision. But, notwithstanding these pious intentions, rising and prohibitive costs of procuring higher education threaten to leave out a large section of the aspiring population from the ambit of higher education. Resource crunch for higher education development is not unique to India. Most other developed as well as developing countries have also been experiencing a similar phenomenon. Governments across the world are exploring alternate routes to support the growth of the higher education system. It is this search for alternatives that has led India also to adopt student loan as a possible means of higher education funding. How has the programme of student loan fared in the Indian context? While the education loan schemes have been in operation for quite some time and several banks have been involved in implementing the schemes, practically no systematic empirical evidence is available on their value in financing of higher education in the country. This book entitled Education Loan and Inclusive Growth: India in Comparative Perspective by Dr. Jacob John is perhaps the first and the only comprehensive analysis of the operational features, issues of implementation and impact of student loans in India. The study is timely and illuminating as it not only makes a critical assessment of the Indian scene but also examines it in the context of experiences from several other countries. It is indeed an invaluable addition to the scanty literature available on the subject of educational financing in India and should serve as a guide for policy makers and planners on higher education. While Dr. Jacob John endorses the idea of expanding the student loan scheme and even recommends for establishing a national body for coordinating all such efforts across the country, he cautions us of the undesirable effects of this approach for raising resources

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Foreword

on issues of equity if it is not carefully calibrated and implemented with sensitivity to the needs of students from socially and economically marginalized sections of the society. I am sure that students and teachers of economics as well as education would find the book an essential source of reference on the subject. Professor R. Govinda Vice Chancellor National University of Educational Planning and Administration

INTRODUCTORY NOTE

There has been increasing recognition in all parts of the world including India of the need to have adequate access at affordable cost to good quality higher education for all eligible members of the society. In-depth studies reveal that universal higher education of high quality requires mindboggling resources. Higher education in India, like in many other developing countries, has not been inclusive of poorer sections of society especially from the rural areas. It is a matter of concern that the problem of finance is a major constraint for a significant section of students to pursue higher education. Among the major countries, India has one of the lowest proportions of young persons in the relevant age group who pursue higher education. Several recent studies indicate the need for non-government sources of funds for higher education. In this context, there is an urgent need for enhanced use of education loan to augment resources for higher education within an appropriate framework of inclusiveness. This book is an attempt to analyze different models of education loan systems across the world. It deals with various models of education loan that have been prevailing in various countries. These models of education loan have certain encouraging features. Four such models of education loan are drawn from the experiences of different countries. These are (a) government guarantee to commercial bank for loan repayment(b) government direct lending, (c) education loan management outsourced with core public management and (d) loan repayment integrated with the taxation system. Education loan system in India does not belong to any of these four models. It is now at an evolutionary stage and it can be reformulated as a model for developing countries. The book discusses Indian system of education loan with special reference to its significance as a tool for financing higher education of all sections of students in India. Findings of field studies conducted in four Indian states show that access to education loan for students from low income families is poor. Incidents of suicide by students after the denial of education loan by bank managers indicate the friction between banks and students on various issues related to loan sanctioning. Some of the case studies presented in the book are related to the denial of education loans to students from low income families by commercial banks and

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Introductory Note

subsequent judicial interventions. The main finding of bankers’ preference for lending to students whose parents are well-to-do to reduce banks’ nonperforming assets is hardly surprising. Certain suggestions made in the book—(a) special efforts should be made to popularise these loans among students and parents and (b) an independent authority should be set up to oversee the functioning of the scheme—are well worth consideration. Dr. Jacob John has spared no effort to keep the quality of the book high. I heartily congratulate him for this effort. I found this book quite informative, illuminating and educational. It highlights strategies for enhancing the resources available for higher education in developing countries like India to make it truly inclusive. I am sure that this book will be useful to educational planners and policy makers not only in India but also in other countries. Dr. N.J. Kurian President, Kerala Development Society–Delhi

LIST OF ABBREVIATIONS

AICTE B.Com B.Sc BA CA CABE CFA EMI FDLP FFELP GDP IBA ICMR ICWA IIIT IIM IISc IIT MBA MBBS MBM MCA MD NAAC NIFT NIT NPA NSC OBC PG PGDM Ph.D PLR PSU RBI SBI

All India Council for Technical education Bachelor in Commerce Bachelor in Science Bachelor in Arts Chartered Accountant Central Advisory Board of Education Chartered Financial Analyst Equated Monthly Installment Federal Direct Loan Programme Federal Family Education Loan Programme Gross Domestic Product Indian Banks’ Association Indian Council of Medical Research Institute of Cost and Works Accountants of India Indian Institute of Information Technology Indian Institute of Management Indian Institute of Science Indian Institute of Technology Master in Business Administration Bachelor of Medicine, Bachelor of Surgery Master in Business Management Master in Computer Application Doctor of Medicine National Assessment and Accreditation Council National Institute of Fashion Technology National Institute of Technology Non Performing Assets National Saving Certificate Other Backward Class Post Graduate Post Graduate Diploma in Management Doctor of Philosophy Prime Lending Rate Public Sector Undertakings Reserve Bank of India State Bank of India

xviii

SBT SC/ST SIB SLBC UGC UIN XLRI

List of Abbreviations

State Bank of Travancore Schedule Caste/Schedule Tribe South Indian Bank State Level Bankers Committee University Grants Commission Unique Identification Number Xavier Labour Relations Institute

CHAPTER ONE EDUCATION LOAN AS AN EMERGING ALTERNATE SOURCE OF FINANCING HIGHER EDUCATION 1.1

Introduction

The trend of financing higher education through education1 loan has spread far and wide in different parts of the developed world, while developing and underdeveloped nations have taken certain initiatives towards it. The recent trend clearly shows that higher education cannot be entirely funded from government funds and, so, developing countries are compelled to make education loan an alternate source of financing higher education. While grants and scholarships remain the two main sources of financing higher education, education loan has not been successful in attracting the attention of stakeholders as an alternate source of financing higher education in the developing and underdeveloped countries. The educational system in India, a prominent developing country, is predominantly a state-funded and state-controlled activity. Given the financial constraints of various Indian states, it has become difficult to meet the ever-increasing financial needs of an expanding education system. The higher education system in India is the third largest after the United States and China. India has 348 universities, 17,625 colleges, over 500,000 teachers and above 10.5 million students. India has 14 open universities and a network of 150 distant educational centers which constitute 20 percent of the higher education system. Without any doubt the Indian higher education system has been growing rapidly, covering all the major disciplines, and to a great extent, meeting the manpower requirements of India. It covers arts and science colleges, medical and engineering colleges, agricultural, pharmacy and management schools. However, it is a matter of serious concern that the Indian higher educational system cannot meet the growing demand. According to the National Knowledge Commission, India would need 1,500 universities by 2015 to meet its growing human resource needs. At present, according to 1

In India and some other countries education loan is also known as student loan.

2

Chapter One

the UGC, there are 620 Universities in India (as of February 11, 2013). While launching the Knowledge Commission, the Prime Minister of India, Dr. Manmohan Singh, said: “At the bottom of the knowledge pyramid, the challenge is one of improving access to primary education. At the top of the pyramid there is a need to make our institutions of higher education and research world class. The time has come for India to embark on a second wave of nationbuilding. Denied this investment, the youth will become a social and economic liability” (Government of India, 2006).

While the higher education system has helped India become self-reliant in many fields, concerns such as market mismatch, quality variations, diminishing and skewed public funding, system inefficiencies, poor accessibility, low quality and regional disparities need urgent attention. These issues are to be tackled to make India a knowledgeable society. Indeed, the restructuring of India’s higher education system has caught the attention of policy makers, and some of the major policy initiatives in this respect are listed below: x National Policy on Education(1986/1992/2000) x Establishment of the National Assessment and Accreditation Council x Technology Vision of India 2020(1996) x Information Technology Action Plan(1998) x Encouraging private investment in professional education x Liberal grant of autonomy—Deemed University status, IIITs, NITs x Installing an educational satellite (2003) x Transforming India into a knowledge superpower—vision (2003) x Draft National Biotechnology Plan(2004/2005) x Upgrading the technical education system—Tech Ed.I, II and III x Setting up a Knowledge Commission (2005) India has a vision to achieve an annual gross domestic product (GDP) growth of 8–10 percent per year through a knowledge-based economy. Financing of higher education is one of the critical areas of growth identified in order to become a knowledge superpower by 2020. “While access, equity and excellence are the goals, these cannot be achieved without a high degree of institutional autonomy, decentralization, innovative structures and systems, and tapping additional resources through a public-private partnership. The stifling oversight of government of which University Grants Commission and All India Council for Technical Education have become willing surrogates, needs to be removed

Education Loan and Inclusive Growth: India in a Comparative Perspective

3

and replaced with a helping hand. Major educational reforms are long overdue. Only then can India become a global educational hub, as it once was” (Karnaik, 2008). In the context of educational reforms, formulation of a viable and suitable tool of educational financing deserves special attention. In order to deal with the issues of poor accessibility and low quality of services in India’s higher education system, a suitable tool of educational financing needs to be formulated. As a part of economic reform measures, Government of India is compelled to explore possibilities for additional resource mobilization to reduce the burden on the exchequer. A general trend in these reform measures is to shift the burden of cost of higher education from the public to private and household domains. Education loan has become a mechanism envisaged to shift the burden to the beneficiaries of education. Under this scheme, individual students are expected to meet the cost of higher education. Recently, the government of India has made some interventions for expanding the scope of the educational loan system.

1.2

Education Loan for Financing Higher Education in Developed and Developing Countries: Literature Review

Various researchers have attempted to study the role of different sources of funding for higher education in developed and developing countries. By and large, there are three major sources of financing higher education: parent/student fund, taxpayer/government fund and contribution of philanthropists. While the cost of higher education is met mainly by parents, students and taxpayers, an institution or philanthropists can also be an important source of financing. Several scholars had pointed out the need for student aid programmes to improve accessibility. “It is essential that a policy requiring the student to pay a portion of the costs be supported either by governmental guarantees, as in the US Guaranteed Student Loans, or by direct provision of governmental capital, as in the Swedish study means, German BAfoG or US National Direct Student Loans”(Johnstone,1989). Woodhall (1970) analysed the objectives of any type of student aid policy, quoting Eide, a Norwegian economist who cited five major purposes:“(a) stimulating demand for education in general (b) stimulating demand for education in particular groups (c)increasing the effective utilization of students’ time (d) promoting student independence and (e) improving the conditions of graduates”. Some studies have highlighted the efficiency of education loan in the context of developing

4

Chapter One

countries. “A partial switch to loans could increase efficiency in at least three ways. First, higher education benefits society as a whole and it therefore aids the efficient allocation of resources if the state pays part of the cost. However, a degree also confers private benefits on students (higher pay, greater satisfaction) and so it is both efficient and equitable if students pay part of the cost themselves. Second, is the issue of capital markets. If capital markets were perfect (i.e. if all students could borrow against their future earnings) the private market could supply loan itself. Since many students are not able to obtain long term private loans, government intervention is necessary, either to guarantee private loans or to provide loan itself. Third, loan reduce the public costs of higher education, making it easier to expand the system to a larger and (it can be argued) more efficient size” (Barr, 1989).The experience of developed nations gives an encouraging scenario. Total cost of higher education in the United States is estimated at 42 percent of GDP per capita per year while that of France is 25 percent. On account of efficient operation of education loan and grant schemes, the actual cost of US higher education has become more affordable at 18 percent of GDP per capita against 19 percent in France (World Bank, 2008). Various aspects of educational loan are studied in the context of escalation of cost of higher education. The overall trend in India, especially since the 1990s, is towards privatization of higher education. The southern states of Andhra Pradesh, Karnataka and Kerala have witnessed a tremendous growth in self-financing colleges, especially in engineering and management. “In 1997, the Government of India in its proposals for subsidies accorded higher education the status of a ‘nonmerit good’ for the first time while elementary education remained ‘meritgood’. The Ministry of Finance reclassified higher education into ‘merit 2 good’, which need not be subsidized by the state at the same level as merit good. Several states have been encouraging self-financing colleges to reduce the public funding of higher education” (Kaul, 2006). Many educational experts have been advocating for drastic reduction in the public funding for higher education (Tilak, 2004). Private cost of education comprises both academic and maintenance cost. Academic cost are related to library and laboratory fee, tuition and examination fee, cost on books, stationery, journals, instruments and payments for private coaching. On the other hand expenses on boarding and food, transport, clothes and related sundry items are considered as maintenance cost (Kumar, 2008). Along with the gradual reduction in the subsidy of higher education in India, the cost of higher education has been increasing in almost all the Indian states. Now let us discuss some of the state-specific

Education Loan and Inclusive Growth: India in a Comparative Perspective

5

studies to examine the cost structure of higher education. Ajit Kumar’s estimates drawn from a field survey show that the average annual private cost per student is Rs.21,360.53 for MBBS day-scholars, Rs.31,083.84 for MBBS resident students, Rs.14,436.23 for B.Sc. nursing day-scholars and Rs.19,226.21 for B.Sc. nursing resident students. This study found that admission to medical courses in Kerala is “largely restricted to the elite groups in terms of financial as well as social background”, while students from majority of households in Kerala face difficulties due to the lack of capacity to meet the high cost of attending medical courses. Salim estimated the annual total private cost as Rs.5,640 for technical and Rs.4,645 for general education at degree and the postgraduate levels in Kerala (Salim,1997). In 2008, he raised the concern that the government has “introduced a large number of self-financing courses in both the government and the private sectors. However, while introducing these measures, the capability of the students, whose academic and nonacademic costs constitute a considerable part of their household expenditure was overlooked or not given due consideration” (Salim, 2008). A survey of 223 colleges affiliated to 3 universities in Punjab found that the overall per unit annual recurring cost was Rs.13,018 during 2000– 04 (Brar, Singh and Ghuman, 2008). The recurring costs have been clubbed into nine broad components: teachers, administrative, repair and maintenance, electricity, consumables, communication and related services, extra mural activities, scholarships and concessions, and miscellaneous or contingencies. This study shows that in the state of Punjab, “ per unit cost level was quite high keeping in view the level and distribution of per capita income in the state”. It is also found that private sector colleges, especially the unaided and self-financing, fix the supply price of education on cost plus basis and students incur many other varieties of direct monetary expenses such as costs on books, stationery, living expenses and transport. In this context, the study raises concerns about the possible threat of pricing out meritorious students who cannot afford the cost. It is quite reasonable to see that the cost of higher education witnesses a consistent and an ever-increasing trend. Due to this continuous increase in the cost of supply of education along with the diminishing budgetary support, higher education institutions resort to internal resource mobilization through the enhancement of existing fees and charges and introduction of new varieties of fees and charges. A study by Guru Nanak Dev University, Amritsar, showed that about 60 percent of the revenue of a typical university originates from non-governmental sources (Raikhy, 2003). In the state of Punjab, a majority of higher

6

Chapter One

educational institutions have introduced “several self-financing and marketable courses of professional variety. Attempts have also been made to finance traditional courses with extra income earned from self-financing courses” (Brar, Singh and Ghuman, 2008). In view of the constraints on resources, now there is a trend of steady withdrawal on the part of the government in financing higher education. Several self-financing, unaided educational institutions are being set up in many states. This has led to the increasing use of educational loan in several Indian states. Scholars hold different views on the merits and limitations of the educational loan system in India. “The need for financing higher education for students, especially those coming from low income households needs special attention. Like in the United States, we may also evolve a guarantee system, where students coming from low income households are eligible for a student loan without parental security or guarantee so that there is no discrimination due to the financial background of the student. Subsidization of the interest rate for students should be based on his/her family income. For this, innovative financial mechanism needs to be evolved incorporating some of the salient features of the systems existing in UK and USA”(Kaul, 2006). The effort to provide access to higher education has focused on keeping fees low, rather than raising access to educational finance and scholarships. This increases the dependence of the university on the University Grants Commission and the state government which limits its autonomy, thus compromising its work environment and constraining diversity within the system (Basant and Mukhopadhyay, 2008). Some scholars have tried to study the role of various sources of funding for higher education in India, such as scholarships, fees and loans. Altbach (2009), while making a comparative assessment of higher education system in India and China, made some observations: “In both countries, increasing tuition costs in both public and private sector institutions has shifted the growing burden for funding higher education to students and their families. Neither country contains an adequate system of grants or loans to ensure equal access to higher education, although both have some financial aid programmes in place and have made efforts to provide access to education for the poor students and students from the deprived populations.” According to Tilak (2004), fees were raised in more than six universities in order to regenerate more than 50 percent of their recurring income. Another 13 universities revised their fee structure to generate 20 percent of their recurring income. He emphasized the need for continuation of the crucial role of the state in funding higher education. However, there is a need to raise more resources which include fees and

Education Loan and Inclusive Growth: India in a Comparative Perspective

7

loans to meet the different components of cost of higher education, that is, academic cost, academic support cost and student welfare cost. He observed that several recent studies reveal the need for serious efforts to raise resources from non-governmental sources to fund higher education. According to Rani (2002), financial non-viability of educational loan and its psychological impact of the burden and societal attitude (“negative dowry” for women) are adverse on students, family and the society. “The concept of student loans does not also recognise the uncertainty of the relationship between higher education and jobs. It is wrong to assume that the link between higher education and occupations is either perfect or even strong” (Tilak, 1999). India has experienced low demand for educational loan due to the poor credit culture of its students. Some studies have raised the limitation of education loan as a source of funding higher education in India. According to some scholars, educational loan can be availed only by a small section of the society mainly due to the weaknesses of the credit market in India. The capital market for higher education loan is imperfect (Lleras, 2005). The major reasons for the imperfect market include information asymmetry and adverse selection. Some scholars hold the view that educational loan is not the solution to the problem of higher education financing. It is inadequate to solve the problems of financing higher education primarily due to market imperfections, discrimination by commercial banks and insecurities in the job market. “On account of the inherent imperfections in this market and discrimination practiced by banks (overtly or covertly), education loans cannot be a solution for students willing to pursue higher education. The uncertain nature of the job market complicates this by subjecting both students as well as lenders to uncertainty. There is an emerging consensus that the government has to find ways to make educational loans softer and more student-friendly” (Chattopadhyay, 2007). Notwithstanding various limitations of the educational loan system, there is a need for popularizing loan as a source of funding higher education in view of the ever-increasing cost of education, and the declining public funds for higher education in countries like India. The principle behind educational loan is that lack of finance should not prevent students from pursuing higher education. It has become an obligation rather than a duty on the part of the society, including banks and the government, to give due importance to preserve a good educational loan system in the country. “The CABE’s [Central Advisory Board of Education] report has suggested the setting up of a Higher Education Finance Corporation by pooling resources from the corporate sector and

8

Chapter One

the government to coordinate loan schemes being operated by banks” (Chattopadhyay, 2007). Notwithstanding divergent views on merits of student loan mechanism, it is gaining much significance as a tool for financing higher education in India. The moot question, in the context of educational needs of developing and underdeveloped nations, is how to provide financial access for students from low income families for undergoing higher education of their interest and choice. Here providing access to quality institutions for these students is also significant. By availing an education loan the student defers the paying of the actual costs of education to coincide with the benefits. Various studies indicate that there is good scope for using educational loan as a tool for financing higher education of students of even low income families. A well-designed educational loan system can not only empower students to get access to quality higher education but also allow cost sharing without affecting accessibility and equity.

1.3

Equity Issues in Higher Education and Relevance of Education Loan in India, a Developing Country

The Indian educational sector needs to address different challenges starting from improving literacy to universalizing access to basic and secondary education. Moreover, it needs to supply trained manpower and higher skills to meet the growing requirements of the nation. It is essential to create a level playing field where backward sections get equality of opportunity in the field of education, especially higher education. Various steps are being taken in the Twelfth Five Year Plan (2012–2017) to improve the higher education system in India. Emphasis is also being given in making higher education more inclusive and more responsive to economic needs. Though the Eleventh Plan (2007–2012) had a sharp focus on education, reduction in the growing mismatch between supply and demand was difficult because of the undue dependence on the government funds. The Twelfth Five Year Plan which focuses on education as a priority sector is expected to give a special emphasis on educational loan as a source of financing higher education. Just about 10 percent of the 16–23 age groups get higher education in India against 50 percent in developed countries. In countries like India a large number of students cannot join higher education, and after joining many of them discontinue their education because of lack of finance to meet the costs of education. The problem of finance, which prevails among a sizable section of students, is a serious issue. The present

Education Loan and Inclusive Growth: India in a Comparative Perspective

9

enrolment in higher education is only 9–11 percent in India as against 45– 85 percent in the developed countries. About 35 percent of India’s population in the age group of 20–25 aspires for higher education (Government of India, 2006). Development of human capital is a national priority issue. Education is a key factor in the development of human resources in India and its national as well as state level policies are framed to meet the growing educational needs through appropriate public and private sector initiatives. The recent trend is to provide primary education to all on a universal basis with government funds, while higher education is progressively moving into the domain of the private sector. There is a gradual reduction in government funds for higher education. In the neo-liberal regime, the costs of higher education in India is on rise and hence there is a need to ensure that no deserving student is denied opportunity to pursue higher education for want of financial support. In this context, educational loan should be seen as an alternate source of financing higher education, an investment for economic development. Higher education has become very expensive in India. Varied fee structures are followed by different educational institutions. Moreover, the expenditure on non-fee components of education has been increasing at a much faster rate. Poor accessibility of higher education to a sizable section of the Indian society has become a serious issue. In view of this trend, a proper student aid policy needs to be formulated. “A large section of students may get an opportunity for education in private and government colleges if a liberal loan facility is available to the persons being included in the under-privileged students category”(UGC, 2011).In this context, it is important to enhance the use of educational loan within an appropriate framework of inclusiveness, as a non-government source of finance.

1.4

The Objectives of Study

The broad objectives of the present study are to x Review different models of educational loan system in various countries, x Study the operational issues of educational loan in India, a developing country, x Examine the socio-economic background of beneficiaries and gender aspect of student loan schemes in India, x Investigate the sensitivity of banks to the needs of the poor or low income students,

Chapter One

10

x x

x

1.5

Study the financial inclusiveness of the educational loan schemes, Suggest measures to improve the effectiveness of student loans as a viable tool for financing higher education, to increase its potential in enhancing investments in higher education in India, and Recommend an action plan to popularize the educational loan scheme as a significant source of financing higher education for inclusive growth in India and other developing countries.

Methodology

1.5.1 The study is primarily empirical and the data from the field is supplemented by secondary sources. Besides the field survey, elaborate discussions were held with a cross section of stakeholders.

1.5.2

Sampling Design

The study is carried out based on a sample survey. It has used a multistage purposive sampling method. Four Indian states, one each from north, south, east and west regions were covered (Table 1.2). Uttar Pradesh (U.P.) as a backward state in respect of higher education from north, and Kerala as a better-performing state from south were taken for the study. From west, Maharashtra, a relatively better-performing state, and from east, Orissa, a backward state, were taken. Table 1.1 Multi-stage Purposive Sampling: Selection of Indian States Region

State

Northern Region Western Region Eastern Region Southern Region

Uttar Pradesh Maharashtra Orissa Kerala

Justification for Selection Backward state Better-performing state Backward state Better-performing state

From each state, 3 districts were selected mainly based on the concentration of educational institutions and students. As it is evident from Table 1.2, the selected districts were Lucknow, Meerut, Ghaziabad (Uttar Pradesh); Pune, Mumbai city, Mumbai Suburban (Maharashtra); Cuttack,

Education Loan and Inclusive Growth: India in a Comparative Perspective

11

Dhenkanal, Baudh (Orissa); and Trichur, Kottayam and Thiruvananthapuram (Kerala). Table 1-2 Multi-stage Sampling: Selection of Districts State Uttar Pradesh Maharashtra Orissa Kerala

Districts Lucknow, Meerut and Ghaziabad Pune, Mumbai city and Mumbai Suburban Cuttack, Dhenkanal and Baudh Trichur, Kottayam, Thiruvananthapuram

Justification for Selection Concentration of educational institutions Concentration of educational institutions Concentration of educational institutions Concentration of educational institutions

The survey covered both rural and urban areas. Three categories of students were selected. Students who had availed loans are the first category. Students who could not avail loans for higher education due to various reasons as a result of which they could not join higher education courses are covered as the second category. The third category includes those students who had applied for educational loan but could not avail it because of their failure in meeting the requirements of the banks. However, these students managed to join higher education courses using other sources of funds. Purposive sampling technique was used to select students and the selection of samples was primarily based on the following factors: a. Annual income of families who had taken loan: the sample covered families of low, medium and large income groups. b. All courses which are funded by the banks are covered: job-oriented professional courses, technical courses, graduation and postgraduation. c. Financing of courses in India and abroad are covered. d. Both public sector and private sector banks which gave loans are covered. e. Geographical location: both rural and urban areas are covered.

Chapter One

12

Table 1.3 Sample Selection: Distribution of Student and Non-student Categories States

Students

Uttar Pradesh Maharashtra Orissa Kerala Total

100 100 100 100 400

Parents, teachers, officials of educational institutions, local government representatives, NGOs, officials of private and public sector banks 100 100 100 100 400

Total

200 200 200 200 800

As it is shown in Table 1.3, a total of 400 students from four states and from three categories of students are studied. From each state 50 cases of students who had taken loans in the last 10 years, making a total of 200, were covered under the study (Table 1.4). Under the category of students who could not avail loans for higher education and as a result could not join higher education courses, 25 such students from each state, making the total of 100, are covered. Again, from the third category of students, those who could not avail loans for higher education but managed to join higher education courses, 25 students are taken from each state, making the total of 100. Table 1.4 Sample Selection: Details of Students from Four States Category Students who have taken loans in the last 10 years Students who could not avail loans for higher education and as a result could not join higher education courses Students who could not avail loans for higher education, but managed to join higher education courses Total

Number 200 100 100 400

Education Loan and Inclusive Growth: India in a Comparative Perspective

13

As it is evident from Table 1.5, parents, teachers and officials of the educational institutions, non-government organizations (NGOs), prominent citizens, and officials of private and public sector banks are covered under non-student categories. From every state, 25 respondents from each of the categories were interviewed. Table 1-5 Sample Selection: Details of Non-students Category from Four States Category Parents Teachers and officials of educational institutions NGOs and prominent citizens Officials of private and public sector banks Total

Number 100 100 100 100 400

1.5.3 A total of 800 respondents were selected for the study. It may be mentioned here that students from both rural and urban areas were covered. Attempts had been made to include students of different courses under both professional and non-professional categories. 1.5.4 Case studies of various types of loan beneficiaries were prepared. As it is evident from Table 1.6, these cases explain specific issues and experiences related to foreign educational loan, recognition of a professional institute in availing loan, premature closure of loan during the period of study and poor/low income family’s difficulties in availing educational loan, repayment of education loan and job insecurity, suicide of a student due to denial of education loan by a commercial bank, and denial of educational loan by a commercial bank and subsequent judicial interventions. Some case studies also provide insight into the risk factors as perceived by the lenders.

Chapter One

14

Table 1-6 Issues and Experiences Covered under Case Studies Sl. No. 1 2 3 4 5 6 7 8

1.6

Issues and Experiences Foreign education loan Recognition of a professional institute in availing loan Premature closure of loan during the course of the study Poor/low income family’s difficulties in availing education loan Arrangement of personal guarantees and collateral securities in availing loan Repayment of education loan and job insecurity Suicide of a student due to the denial of education loan by a commercial bank Denial of education loan by a commercial bank and subsequent judicial interventions

Data Collection

Both primary and secondary data are used for this study. The methodology adopted for collection of required data consists of the following:

1.6.1

Primary Data

Data is collected from the beneficiaries who have availed education loan, non-beneficiaries and other stakeholders through interviews using structured schedules. Information is collected through open-ended questions, discussions and interactions. Identification and selection of respondents under different categories were undertaken with the help of various stakeholders. Based on the information provided by branch managers of commercial banks, loan beneficiaries were identified and selected. Several educational institutions extended co-operation in identifying students under the non-beneficiary category. Some local government institutions were also useful in identifying NGOs and prominent citizens.

Education Loan and Inclusive Growth: India in a Comparative Perspective

1.6.2

15

Secondary Data

Various types of secondary data such as guidelines of Reserve Bank of India (RBI), Indian Banks’ Association (IBA)2 and private sector and public sector banks in respect of education loans are used for the study. These include books, articles, periodicals and websites of the relevant institutions.

1.6.3

Schedules

Two sets of schedules were used to canvass the information necessary for making a detailed analysis of socio-economic impact of higher educational loan system in India. The first set was to collect information from four categories of respondents: x Students who had taken loans. x Students who could not avail loans for higher education due to their failure in meeting the requirements of banks, but managed to join higher education courses. x Students who could not avail loans for higher education due to various reasons, and as a result could not join higher education. x Parents, teachers, officials of educational institutions, NGOs, officials of private and public sector banks, and prominent citizens. The second set was to collect information from bank officials required for examining operation and management of educational loan. The schedules were written in English and were pilot-tested in Trichur (Kerala), Bhubaneshwar (Orissa), Noida (UP) and Pune (Maharashtra). Thereafter, they were revised, retested and finalized. 1.6.3.1

Schedules for Students: Loan Beneficiaries

This schedule is very elaborate with a total of over 60 questions regarding the diverse aspects of educational loan and its beneficiaries. This schedule is divided into three parts, A, B and C. Part A is meant for collecting information on the identification particulars of the respondent. The details

2

Indian Banks Association is the national body of Indian Banks and comprises lenders from public, private and foreign sectors.

16

Chapter One

of educational background, family income and financial standard of living are also collected. Part B attempts to ascertain information about students who have taken loans. This section relates to questions on educational information. Part C deals with budget and financing. The conditions, procedures and other details for sanctioning and disbursals of loan are dealt with in this section. This part also seeks suggestions from loan beneficiaries for improvements in the educational loan system in the country. 1.6.3.2

Schedule for Students (Non-beneficiaries), Parents and Institutions

This schedule is divided into four parts, A, B, C and D. Part A attempts to collect information relating to identification particulars of the respondent. Part B deals with questions on information about students who could not avail loans for higher education, but managed to join higher education courses. Part C attempts to collect the opinion about the use and effectiveness of education loan from representatives, teachers, other officials of the educational institutions, the public, NGOs, and government officials. Part D deals with the questions on information about students who could not join higher education mainly due to the unavailability of education loans. 1.6.3.3

Schedule for Bank Officials

This schedule attempts to canvass information from bank officials. It covers the identification particulars of the concerned bank officials and information about various aspects of the operation and management of education loan. It includes guidelines given by each bank for providing education loan, such as interest rate, guarantee and collateral, and processing of loan application form. This schedule attempts to cover information about operational problems in managing loan and their repayment trend. This section also covers questions related to the role of the present educational loan mechanism in promoting the inclusion of poor, excluded communities and minorities. It elicits views and opinions of bank officials on possible measures to improve the effectiveness of educational loan as a viable tool for financing higher education.

Education Loan and Inclusive Growth: India in a Comparative Perspective

1.7

17

Field Survey Problems

For a variety of reasons, it proved impossible to stick to our strictly defined sampling and interview strategy. Some of the loan beneficiaries were hesitant to divulge the details of the loan. It seems that they were afraid of any possible follow-up by government agencies, especially income tax officials. Another group of people were not revealing whether they had availed loan or not. They felt that revealing the education loan details might affect their social status. Some people in states like Kerala hold an impression that the availing of loan would expose the financial weaknesses of their families and prefer to keep loan details as a secret. Another major difficulty was getting information from banks. As banks are supposed to keep the details of their clients confidential, it was not possible to collect critical information about the loan beneficiaries from the concerned bank. In several places concerned bank officials were unwilling to co-operate with the study by providing any form of information.

CHAPTER TWO EDUCATION LOAN SYSTEM: SIGNIFICANCE AND EXISTING MODELS IN SELECT COUNTRIES In this chapter we discuss the distinguishing features of educational loan schemes of selected countries in a comparative perspective. There are wide variations among countries in respect of administration of education loans. These disparities are mainly in respect of targeting the loan programme and loan recovery. The repayment of loan is a major problem that has affected the financial viability of most of the educational loan programmes in most nations. The failure of many students to repay their debt continues to be the concern of loan managers. Non- repayment on the part of the students can be attributed to two reasons, inability of students to repay and evasion of repayments. The model of an educational loan system is mainly influenced by two factors: (1) choosing measures for preventing evasion of repayment of loans and (2) selection of an appropriate infrastructure to collect repayments.

2.2

Education Loan System: Country Experiences

The relevance and significance of student loan needs to be discussed in the context of different models of financing of higher education prevailing in various countries. The state holds responsibility for financing higher education in countries such as France. Some other countries, such as the United Kingdom, encourage universities and colleges to raise their own funds as well, even while the state supports higher education significantly. The United States has a unique model of co-existence of private and government funded universities. Donations from several charitable funds and alumni funding are important sources of funds for universities and colleges in the United States. British universities mobilize huge funds through charging foreign students, excluding those from the European Union, with a substantially high rate of fee (Kaul, 2006). The United States, where more than 80 million people have availed higher education loan, has three big and five small student loan programmes. The Federal

20

Chapter Two

Family Education Loan Program (FFELP), Federal Direct Loan Program(FDLP) and private loan programmes are the major ones. In addition, there are smaller programmes that include the Perkins Loan Program for undergraduate students and four loan schemes for health professionals (Mayes, 2007). FFELP is a loan guarantee scheme in which banks and other financial institutions provide loans using private capital. The essential feature of FFELP is the guarantee of the repayment of loan, in case of default by the borrower, given by “a state agency or a non-profit organization designated by a state to act as a guarantor”. By using public funds, the US government provides loans to students directly under FDLP. It may be noted that there is no direct government support for the private loan scheme. In New Zealand education loans were fully income-contingent until December 1999. Thereafter government made some changes such as withdrawal of interest on education for students from low income families and reduction in the interest rate for others. The New Zealand strategy for financing tertiary education, especially its education loan scheme, has caught the attention of several scholars. “A first, and fundamental, characteristic of a well-designed loan scheme is that it should have income-contingent repayments, i.e. repayments which take the form of x per cent of earnings collected alongside income tax. Second, loans should be sufficient to cover all fees and all living costs, so that tertiary education is free at the point of use. Loans in New Zealand – uniquely – have both features” (Barr, 2000). In this context, we should also bear in mind that UK and Australia have income-contingent loans, but not all tuition fees and living costs are covered and so many students face upfront charges. Incomecontingent repayment means the repayment of loan is according to the ability-to- pay; thus, people with higher earning make higher amount of repayment and those with lower income make lower repayment. According to Nicholas Barr, this scheme has a “strong appeal to social justice”. It is also argued that under a well-designed loan programme, students should pay “a market interest rate on their loans, where ‘market rate’ means a rate related to the government’s borrowing rate, not the significantly higher rate for unsecured commercial loans nor a lower interest rate which requires a taxpayer subsidy. The essential feature of this arrangement is that, apart from non-repayment because of low earnings, early death, etc., loans are self-financing. Interest subsidies are inefficient”. The major criticism against interest subsidy is that it is untargeted, and giving it to all the students is quite unfair as it “benefits middle class most”. For an equitable model of education loan it should “charge a market rate and to use the savings to help

Education Loan and Inclusive Growth: India in a Comparative Perspective

21

some students, specially (a) to promote access, and (b) to help those whose subsequent earnings are low”. The essential feature of Higher Education Loan Programme (HELP) in Australia is its integration with the tax system. Student loan repayments are made through the taxation system and loan default is impossible unless a person is a tax evader. Other features of HELP are interest-free loans, income-contingent repayment with indexation of loan balance, and bonuses for faster repayment. This programme has a comprehensive legislative basis, and students’ rights and obligations are set by law and not by contract (website www.goingtouni.gov.au). An institution’s student administration, institutional financing, government accounting and taxation system are integrated under the HELP model. Under the institution’s student administration, an institution manages the student interface. Students submit applications and each student is given a unique identification number that follows them across institutions. It is noteworthy to mention that there is an electronic interface of the institutions’ data systems with the Australian government, and loan data are transferred electronically to the taxation office and compulsory repayments are added to income tax assessment. HELP is integrated with the budget process of Australia and its financial statements. Under the HELP system there is no financial risk for institutions as it ensures a predictable cash flow. It is quite interesting to note that Ghana and Kenya have education loan programmes open to all categories of students without considering need and ability. The National Savings Bank manages the student loan programme in Venezuela and does not suffer from problems of default. In Honduras private agencies are used to locate students and recover loan in order to improve loan repayment rate. It is reported that the rate of loan default is quite low in Sweden, Hong Kong and Quebec (a state in Canada) where students are exempted from payment when a graduate’s income falls below a threshold level. From the experiences of different countries(leaving out the Indian experience), four different models of education loan schemes can be drawn:(1) education loan: government guarantee to commercial bank, (2) education loan: government direct lending, (3) education loan: outsourced with core public management and (4) education loan: loan repayment integrated with the taxation system.

22

2.2.1

Chapter Two

Model 1: Education Loan: Government Guarantee to Commercial Bank

The national government provides a guarantee of repayment of student loan to the commercial bank. The government of every nation makes the necessary legislation for the operation of the loan system. It is the responsibility of every commercial bank to operate the loan scheme including disbursement, recovery and management of information systems. Under this model, if the student fails to repay the loan, government will repay the loan to the commercial bank. Commercial banks in some countries finance loan via securitization on the financial market. Countries such as the United States, Chile and China have been using this model. Out of two models prevailing in the United States, about 95 percent of education loan is given under the guarantee scheme. In the Chilean system of government guarantee scheme, there is competition among banks, which controls excessive profit and, moreover, universities bear about 70 percent of the financial risk of students dropping out. Canada was earlier using this model, but is currently using Model 3, that is, education loan: outsourced with core public management (see Section 2.2.3 of this chapter).

2.2.2

Model 2: Education Loan: Government Direct Lending

Under this scheme, government allocates budget on a continuous basis for providing student loan and entrust the task for operating the loan system with a government agency. Students avail the loan from the government agency which deals with disbursement, recovery of loan and maintenance of the information system. This system prevails in many developing countries such as Thailand, Philippines, Peru and Mexico. This system, by and large, has not proved an effective system as the operation of the loan scheme remains with a government agency.

2.2.3

Model 3: Education Loan: Outsourced with Core Public Management

Under this model government allocates budget for providing student loan and the task of administering the loan system is outsourced to a private agency. Canada and one of the US programmes, the direct loan

Education Loan and Inclusive Growth: India in a Comparative Perspective

23

programme, follow this model. Government has the freedom to change the agency as and when it is required to enhance the efficiency under this scheme.

2.2.4

Model 4: Education Loan: Loan Repayment Is Integrated with the Taxation System

In UK and Australia, where the tax system is working well, the education loan system is integrated with the tax system. Under the prevailing system, government pays the loan and the student repays the loan when the student gets a job. If the student cannot get a job, the loan need not be repaid. The amount of repayment is according to the earning of the student based on the principle, “the more you earn the more you repay”. This is possible when the tax system and student loan repayments are integrated. Under this model, repayment system is linked to the taxation system. This model can work only when information about the income is available. It may be noted that in countries where the informal sector has a larger share, this system cannot work. The above-mentioned education loan models working in different countries do not provide any perfect system of education loan. The opinion of Woodhall (1970) that “a perfect system of student aid has not yet been developed in any country” is still relevant. We cannot simply conclude that a particular model of education loan is perfect; instead, an optimum model of a loan system suitable to a country needs to be formulated after considering its socio-economic and educational situations.

2.2.5

Education Loan System in India: An Evolving Model

The Indian education loan system has similarities with Model 1 that provides a guarantee of repayment of student loan to the commercial bank by the government. The Indian model of student loan is in an evolutionary stage. Currently there is no involvement of any type of private agencies in the operation and management of student loan in India. Governmentowned public sector banks and privately owned scheduled banks1 operate 1

Indian commercial banks consist of Scheduled Banks and Non-scheduled Banks. Scheduled Banks constitute those banks which have been included in the second schedule of the Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section

24

Chapter Two

and manage it under the guidance of Government of India. Government of India has issued certain guidelines enlisting broad objectives of education loan and procedures for sanction, disbursement and recovery. In India, government does not give any guarantee of repayment of student loan to the commercial bank. Indian Banks’ Association (IBA), the national body of banks, has given a model of education loan. Branch Managers of government-owned banks and private banks under the category of scheduled banks grant education loans on the lines of the IBA Model. Education loans up to Rs. 750,000 can be granted by banks without any collateral security and third party guarantee. Earlier the limit was Rs. 400,000 instead of Rs. 750,000. Though the present scheme is not flexible to the needs of the weaker sections, Government of India has recently introduced an interest subsidy scheme for education loans. According to the scheme announced by the Ministry of Human Resource Development, Government of India, students whose parents’ income is up to Rs. 450,000 per annum are eligible for 100 percent interest subsidy on education loans availed from scheduled banks. Interest subsidy is available for loans disbursed on or after 1 April 2009. Students who had loans sanctioned prior to that date would also be eligible for interest subsidy on fresh disbursements made by banks on or after 1 April 2009. The subsidy would be paid on interest charged during the study period as well as the subsequent moratorium period before commencement of repayment. The subsidy is applicable for pursuing any of the approved courses of studies in technical and professional streams from recognized institutions in India. Students eligible for subsidy under the scheme can approach the bank branch from where loans had been availed along with the income certificate issued by the competent authority designated by the respective state governments/ governments of Union territories. Government has already released interest subsidy for the financial year 2009–10. Branch managers of scheduled banks granting educational loans on the lines of the IBA Model Educational Loan Scheme are asked to provide guidance to students or parents in filing their application for subsidy. They should ensure that applications are processed and submitted to their head offices so that consolidated subsidy claims for each year are lodged with the nodal bank before the end of the financial year, thus enabling all eligible students to benefit from the scheme (http://www.education.nic.in).

42(6)(a) of the Act. Non-scheduled Bank means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank.

Education Loan and Inclusive Growth: India in a Comparative Perspective

25

Due to mounting pressures, the government is working out some modalities to announce a credit guarantee fund for education. It is proposing to establish a Credit Guarantee Fund Trust to administer and operate the Credit Guarantee Fund Scheme for education loans granted by banks up to Rs. 750,000 without any collateral security and third party guarantee (IBA circular 25 May 2012). Government of India has also initiated steps to take punitive actions against branch managers of public sector banks if an increase in education loan rejections is detected. In this regard, Finance Minister P. Chidambaram said that like a bank account is a right of an individual, an education loan is a right of every student, and the officials with the public sector banks who are found rejecting a large number of applications may be penalized for denying the loans. “No application from a deserving candidate, if he/she meets the parameters, should be turned down by the (bank) officer receiving it. If a loan is not given, the decision can be taken only at one level higher to the officer receiving the loan application,” said the Finance Minister (IBN News, 18 August 2012). It is interesting to note there is an increasing tendency of seeking judicial interventions by the applicants of education loan against rejection of applications by banks.

CHAPTER THREE TRENDS AND ISSUES OF OPERATION OF EDUCATION LOAN IN INDIA: A CASE STUDY OF A MAJOR DEVELOPING COUNTRY

Several scholars have questioned the viability of education loan in developing countries. It is important to understand that developing countries do not have a well-developed educational credit market. Moreover, they have a weak linkage between education and employment in their labour markets. Recovery of loan is very poor in most of the developing countries. It is a fact that developing countries, by and large, have launched different models of education loan schemes though these are not large-scale education loan programmes with huge initial funds. In this context we discuss the growing significance of education loan as a source of financing higher education in India with a special reference to the operational problems from the perspectives of borrowers, lenders and policy makers. As a case study of a developing country, the salient features of education loan programme in India are discussed in this chapter. .

3.1

Salient Features of the Education Loan System in India as on December 2012

3.1.1 All the institutions of higher learning in the country have been divided into three categories: Category I: University and university-level institutions – All Institutions which are established x Under a Central Act, a Provincial Act or a State Act (Central University/State University), x As an institution deemed to be a university under section 3 of the UGC Act 1956,for example, Deemed University,

28

Chapter Three

x As an institution specially empowered by an Act of Parliament to confer or grant degrees, for example, Institution of National Importance (IITs, NITs, etc.), and x By other Central Ministries by an Act of Parliament such as the NIFT. Category II: Colleges/institutions affiliated to a university – This constitutes: x Colleges affiliated with a university (constituent/university college, affiliated colleges including autonomous colleges), x Institutions for which degree is awarded by a university but the institution is not affiliated with the university, x Post-graduate (PG) centers of a university, and x Off-campus centers/constituents units of institutions deemed to be university Category III: Institutions not affiliated to any university – These institutions are termed as stand-alone institutions for the purpose of the survey. These are the institutions which provide PG diploma/ diploma degrees but are not affiliated or recognized by any university/universitylevel institutions. However, their courses are recognized or approved by one or the other statutory bodies such as the All India Council for Technical Education (AICTE), Indian Nursing Council, etc. These details are as follows: x All such institutions which are conducting PG diploma/diplomalevel courses recognized by AICTE but not affiliated to any University x Teacher training institutes running diploma-level courses approved by the National Council of Teacher Education, for example, District Institutes of Education and Training(DIETs) x Polytechnics x Nursing institutes running General Nursing and Midwifery(GNM) courses approved by the Indian Nursing Council. x Institute of Charted Accountants of India x Institute of Company Secretaries of India x Actuarial Society of India (Government of India (2011) “All India survey on higher Education by MHRD”, Department Of Higher Education Planning, Monitoring & Statistics Bureau)

Education Loan and Inclusive Growth: India in a Comparative Perspective

29

Education loans in India are provided mainly by the commercial banks. To a limited extent, co-operative banks also provide education loan. The following are the scheduled banks in India in the public sector: x State Bank of India x State Bank of Bikaner and Jaipur x State Bank of Hyderabad x State Bank of Indore x State Bank of Mysore x State Bank of Saurashtra x State Bank of Travancore x Andhra Bank x Allahabad Bank x Bank of Baroda x Bank of India x Bank of Maharashtra x Canara Bank x Central Bank of India x Corporation Bank x Dena Bank x Indian Overseas Bank x Indian Bank x Oriental Bank of Commerce x Punjab National Bank x Punjab and Sind Bank x Syndicate Bank x Union Bank of India x United Bank of India x UCO Bank x Vijaya Bank The following are the scheduled banks in India in the private sector: x ING Vysya Bank Ltd x Axis Bank Ltd x Indusind Bank Ltd x ICICI Bank Ltd x South Indian Bank x HDFC Bank Ltd x Centurion Bank Ltd

Chapter Three

30

x x

Bank of Punjab Ltd IDBI Bank Ltd

In India four types of banks provide education loan: x Public sector banks x Private sector banks (Traditional banking institutions) x Private Sector Banks(New generation banks) x Co-operative banks The government is the major shareholder of public sector banks, which functions on the traditional banking principles. The first category of banks covers all the public sector banks such as the State Bank of India, Syndicate Bank, Andhra Bank, Canara Bank, State Bank of Travancore, Punjab National Bank and Central Bank of India. Among the private sector banks there are two categories: the first one follows traditional banking and the second one adopts modern banking tools. Federal Bank, South Indian Bank and Catholic Syrian Bank are examples of private sector banks which adopt traditional banking styles. ICICI Bank and Axis Bank belong to the category of new generation banks.1 Co-operative banks do not come under the category of commercial banks. It should be noted that all loans are either secured or unsecured. In the case of secured loans the money lent is always secured against a property, and on default on the repayments, the lender has the right to apply to the courts to take possession of the mortgaged property and to sell it to recover the loan. Housing loans or vehicle loans belong to this category. Unsecured loans, on the other hand, are normally offered for smaller amounts of money with a repayment period set anywhere between three to six years (website www.investorprofit.com). Education loan is an unsecured loan as security is not offered to the lender, and the lender views the loan as a riskier venture since it has no automatic route to get back what it is owed. In India, however, a majority of the education loans are secured, as collateral securities are required to avail education loan above a specified amount. Nevertheless, during the period from 2004 to 2012, banks were advised by the government to provide loans up to the amount of Rs.400,000 as unsecured loan. Since 2012, banks have been advised to provide educational loans up to Rs. 750,000without any collateral security and third party guarantee.

1

Some public sector banks as well as private sector banks have initiated a gradual introduction of modern banking tools.

Education Loan and Inclusive Growth: India in a Comparative Perspective

31

As in the case of other countries, parents and families, students, governments, commercial banks and educational institutions are the major stakeholders of education loan in India. Allocation of funds, administration of loan and maintenance of information systems are the sole responsibility of commercial banks in the country. A study shows that education loan has an insignificant share of just 3.9 percent as a source of financing private cost of higher education in the state of Kerala (Table 3.1). Salary of parents is the main source of financing private cost of higher education. Other sources are retirement benefits of parents and scholarship fee concessions. The data on disbursement of loans by commercial banks in India reveals that Kerala is among the front-running states in respect of disbursement of education loan. Hence, it can be safely concluded that education loan has an insignificant share as a source of financing of higher education in most of the Indian states. Table 3.1 Source of Financing Private Education Cost: Share of Education Loan (%) Source

MBBS

BDS

B.Pharm

Total

2.6

B.Sc Nursing 3.1

Loan from Banks Salary of Parents Retirement Benefits of Parents Scholarship/Fee Concessions Others Total

4.9

-

3.9

62.0 7.4

60.5 5.3

64.6 -

47.1 5.9

61.5 6.0

1.2

7.9

3.1

-

2.5

24.5 100

23.7 100

29.2 100

47 100

26.1 100

Source: Kumar (2008)

3.1.2

Demand for Loans: Role of Students/Parents

It is important to note that the demand for education loan was quite low in India till early 2012, as the majority of Indian students were enrolled into non-professional colleges. For instance, in Kerala, arts and science colleges that teach non-professional courses have 172,573 students

32

Chapter Three

(Government of Kerala, 2007). On the other hand, professional colleges in the state have just around 30,000 students. Skill development and capacity building of students are not taking place in the non-professional colleges. Lack of timely revision of curricula and syllabi and non-availability of vocational courses have made the non-professional colleges “centers producing unemployable youth”. While skill-building ability can translate the demographic dividend into development dividend, these institutions are unable to provide students with adequate skills for participating in various economic activities in India. In most of the Indian states, employability of students graduating from non-professional colleges is abysmally low. This has mainly resulted in poor demand for education loan. However, since 2012, there has been a gradual increase in the demand for loans, primarily due to the increase in the number of professional colleges and enhanced awareness level about the availability and significance of education loan among students and parents.

3.1.3

The Role of Government

The role of government and educational institutions in the operation of the education loan system is quite limited in the country. However, the central government does take certain measures such as issuing policy directions and guidelines to popularize education loan in the country. Even some of the state governments also take some interest in popularizing education loan schemes.

3.1.4

Tax Exemption for Education Loan in India

In order to popularize the loan scheme, the government of India provides tax exemptions for education loan. Since 2007–08, under Section 80E of the Income Tax Act, not only students who have taken higher education loan but also their parents are eligible for availing tax exemption for the interest component of the loan. There is no limit for the interest amount for tax exemption while the repayment has to be made from the taxable source of income. Prior to that, only students who have availed education loan were eligible for tax exemption. Another interesting aspect is that interest exemption can be claimed within a period of eight years since the starting of the repayment of interest on the loan. Even if there is premature repayment of the loan, the exemption can be claimed. In fact, up to 2005–

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33

06, tax exemption was given to both interest and capital components of the loan. Some state governments have taken interest in popularizing education loan. Kerala and Karnataka are such examples. In Kerala, after the incident of suicide committed by a girl student in 2004 when her loan application was rejected, the state government had taken certain measures to ensure the availability of loan to students from poor/low income families and backward classes. On 4 September 2008, the government of Karnataka has announced the reduction of interest rate on education loan for all categories of students. As most banks charge around 12 percent interest, students are required to pay only 6 percent and the government will meet the excess amount (http://india-investments.blogspot.com).

3.1.5

Education Loan under Priority Sector Advances and Cheaper Education Loans for Girls

IBA, the national body of banks, plays a significant role in the education loan mechanism. It issues guidelines and instructions to banks regarding various aspects of education loan. For instance, it had asked its members to provide education loans at concessional rates in February 2009, in view of the economic recession. The public sector banks, subsequently, provided a special interest rate discount of at least 0.5 percent. In fact, some of these banks were already offering concession to girls for education loans and in February 2009 a dedicated scheme for all the public sector banks was introduced. (Economic Times, 23 February 2009). The RBI classified education loans as priority sector advances, and according to the rules, at least 40 percent of the bank loans should be allocated to the priority sectors such as agriculture, small enterprises, education and housing.

3.1.6

Procedures for Availing Education Loan in India

Now let us examine the procedure for sanctioning an educational loan in India. Commercial banks in India have certain procedures for disbursing education loan. Indian banks, by and large, process the education loan application based on the following documents:

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x Grade certificate/mark sheet of last qualifying examination for school and graduate studies in India x Proof of admission to the course from institution x Letter from institution stating the schedule of expenses for the course x Identity proof or proof of residence x Copies of foreign exchange permit, if applicable (for foreign education loan) x Income statement of guarantor (if the loan amount is small, this is not required) x Income tax assessment order not more than two years old x Brief statement of assets and liabilities of the borrower/statement of bank account for the last six months of the borrower x A bank account x Stamp papers in the name of three parties (guarantor, bank and applicant) x Two passport-size photographs The repayment of the loan needs to be made in “equated monthly installments” (EMI), which comprise both principal and interest components, and would be calculated depending on the tenure within which the borrower chooses to repay the loan. The EMI would be higher if the person chooses to repay within a shorter period as against a longerterm loan. A shorter repayment period, however, reduces interest cost over the term of the loan. The repayment of the loan would begin one year after the course period or six months after borrower gets a job, whichever is earlier. Students are expected to pay a minimum amount equivalent to the EMI on a monthly basis. However, they can choose to pay more than the EMI, and banks do not charge any prepayment penalty. The outstanding interest for the moratorium period will be added to the loan amount at the time of commencement of the repayment. The EMI will be determined on this amount at the time the repayment is to commence. Most of the educational schemes can be availed from all branches of the concerned commercial bank. In the case of State Bank of India, for instance, the loan is available from all branches in metro or urban areas as well as those having personal banking divisions.

Education Loan and Inclusive Growth: India in a Comparative Perspective

3.1.7

35

Model Education Loan Scheme of Indian Banks’ Association

All the banks follow their own procedures in sanction, disbursement and repayment of education loan in India. However, these procedures are in line with the guidelines issued by IBA. The Ministry of Finance, Government of India had initiated a move to set up a model education loan scheme on the basis of observations by a parliamentary panel. IBA had prepared a model education loan scheme in 2001. Again in line with the announcement made by the Finance Minister in his budget speech for 2004–05, IBA had made certain changes in the security norms applicable to education loans with the limits of above Rs.400,000 and up to Rs. 750,000. Subsequently, a Working Group of General Managers drawn from the selected banks was constituted by IBA to review the scheme and make modifications in the scheme to facilitate smooth operations at various bank branches. Based on the suggestions made by the working group a revised model of education loan scheme was prepared.

Highlights of the Revised IBA Model Education Loan Scheme, September 2012 x x x x x x x

Admissions under management quota kept outside the scope of the scheme Scholarship/fee waiver available to students will be taken into account Know Your Customer (KYC) compliance should be done by the bank branch Part-time courses could be considered Banks could consider rating of educational institutions and students Banks can offer differential interest rates Tracking of students should be done on completion of the course.

Objectives and Applicability of the Scheme The education loan scheme outlined below aims at providing financial support from the banking system to deserving or meritorious students for pursuing their higher education in India and abroad. The main emphasis is that every meritorious but financially weak student is provided with an opportunity to pursue education with financial support from the banking

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system with affordable terms and conditions. No deserving student should be denied an opportunity to pursue higher education for want of financial support. The scheme detailed below could be adopted by all commercial banks. The scheme provides broad guidelines to the banks for managing the educational loan scheme, and the implementing bank will have the discretion to make changes suiting to the convenience of the students or parents to make it more customer-friendly.

Eligibility Criteria The student should be an Indian national and should have secured admission to professional or technical courses in India or abroad through entrance test/merit-based selection process.

Courses for studies in India Courses eligible for studies in India are as follows: ƒ Graduation courses: B.A., B.Com., B.Sc., etc. ƒ Post-Graduation courses: Masters and Ph.D. ƒ Professional courses: engineering, medical, agriculture, veterinary, law, dental, management, computer, etc. ƒ Computer certificate courses of reputed institutes accredited to the Department of Electronics or institutes affiliated to a university. ƒ Courses like Institute of Cost and Works Accountants of India (ICWA), Chartered Accountants (CA), Chartered Financial Analyst (CFA) etc. ƒ Courses conducted by Indian Institute of Management (IIM), Indian Institute of Technology (IIT), Indian Institute of Science (IISc), Xavier Labour Relations Institute (XLRI),National Institute of Fashion Technology (NIFT), etc. ƒ Regular degree/diploma courses like aeronautical, pilot training, shipping, etc., approved by the Director General of Civil Aviation/Shipping, if the course is pursued in India. In case the course is pursued abroad, the institute should be recognized by the competent local aviation/shipping authority. ƒ Courses offered in India by reputed foreign universities. ƒ Evening courses of approved institutes. ƒ Other courses leading to diploma/degree, etc., conducted by colleges/universities approved by UGC/government/AICTE/ Indian Council of Medical Research (ICMR) etc.

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ƒ Courses offered by national institutes and other reputed private institutions. Banks may have a system of appraising other institution courses depending on future prospects/recognition by user institutions. ƒ Courses that are not covered under the criteria mentioned above may be considered for loan based on view taken by individual banks.

Courses for Studies Abroad Courses eligible for studies abroad are as follows: ƒ Graduation: For job-oriented professional/technical courses offered by reputed universities. ƒ Post-graduation: MCA, MBA, MS, etc. ƒ Courses conducted by Chartered Institute of Management Accountants (CIMA), London; Certified Public Accountants(CPA) in the United States; etc.

Expenses Expenses considered for loan are as follows: ƒ Fee payable to college/school/hostel. ƒ Examination/library/laboratory fee. ƒ Purchase of books/equipment/instruments/uniform. ƒ Caution deposit/building fund/refundable deposit supported by institution bills/receipts, subject to the condition that the amount does not exceed 10 percent of the total tuition fees for the entire course. ƒ Travel expenses/passage money for studies abroad. ƒ Purchase of computers essential for completion of the course. ƒ Insurance premium for student borrower. ƒ Any other expense required to complete the course like study tours, project work, thesis, etc.

Loan Amount, Interest, Margin and Security The amount of loan is based on the need, subject to repaying capacity of the parents or students with margin and the ceilings. A maximum of Rs.1 million can be given for studies in India and a maximum of Rs.2 million for studies abroad. The margin money to be spent by the student or parent is zero up to a loan of Rs. 750,000 and 5 percent for loan above

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Rs.750,000. However, a 15 percent margin money is required for studies abroad. Up to an amount of Rs. 750,000, loan will be given based on the coobligation of parents without any security. The loan amount of above Rs.750,000 requires co-obligation of parents together with tangible collateral security of suitable value, along with the assignment of future income of the student for payment of installments. The loan documents should be executed by both the student and the parent or guardian as joint-borrowers. The security can be in the form of land or building or government securities or public sector bonds or units of Unit Trust of India (UTI), National Saving Certificate (NSC), Kisan Vikas Patra (KVP), life insurance policy, gold, shares or mutual fund units or debentures, bank deposit in the name of student/parent/guardian or any other third party with suitable margin. Wherever the land or building is already mortgaged, the unencumbered portion can be taken as security on second charge basis provided it covers the required loan amount. In case the loan is given for purchase of computer, the computer has to be hypothecated to the bank.

Rate of Interest Up to Rs. 400,000 of loan, the rate of interest is the Prime Lending Rate (PLR). However, for an amount above Rs.400,000 the interest rate is PLR plus 1 percent. Simple interest is to be charged during the repayment holiday or moratorium period.

Appraisal, Sanction and Disbursal In the normal course, while appraising the loan, the future income prospects of the student will be looked into. However, where required, the means of parent/guardian could also be taken into account to evaluate repayment capability. The loan is to be sanctioned as per delegation of powers preferably by the branch nearest to the place of residence of parents. Application for education loan received should not be rejected without the concurrence of the next higher authority. The loan is to be disbursed in stages as per the requirement or demand directly to the institutions, vendors of books, equipment and instruments to the extent possible.

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Repayment There is a repayment holiday or moratorium during the course period plus 12 months or 6 months after getting job, whichever is earlier. The loan is to be repaid in 5–7 years after commencement of repayment. If the student is not able to complete the course within the scheduled time, extension of time for completion of course may be permitted for a maximum period of 2 years. If the student is not able to complete the course for reasons beyond his control, the sanctioning authority may at his/her discretion consider such extensions as may be deemed necessary to complete the course. The accrued interest during the repayment holiday period is to be added to the principal and repayment in EMI fixed. One percent interest concession may be provided for loan beneficiaries if the interest is serviced during the study period when repayment holiday is specified for interest or repayment under the scheme.

Insurance and Processing Charges Banks may arrange life insurance policy on the students availing education loan. Individual banks may work out the modalities with insurance companies. Processing or upfront charges may not be collected on education loans for studies in India.

Follow Up Banks need to contact college/university authorities to send progress report to the bank at regular intervals in respect of students who have availed loans. In case of studies abroad, bank may obtain the Unique Identification Number (UIN)/identity card and note the same in the bank’s records.

Capability Certificate Banks can also issue the capability certificate for students going abroad for higher studies. For this purpose financial and other supporting documents may be obtained from the applicant, if required. Some of the foreign universities require the students to submit a certificate from their bankers about the sponsors’ solvency or financial capability, with a view to ensure that the sponsors of the students going abroad for higher studies are capable of meeting the expenses till completion of studies.

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Other Conditions Banks which wish to support highly and exceptionally meritorious or deserving students without security may delegate such powers to a fairly higher level authority. In case of receipt of application for more than one loan for student borrower from a family, the ‘family’ as a unit has to be taken into account for considering the loan, and security taken in relation to the total quantum of finance disbursed, subject to margin and repaying capacity of the parents/student. There is no specific restriction with regard to the age of the student to be eligible for education loan. In cases of student staying with parents and where such parents have transferable jobs or there is a change in address, the bank may provide in the system of noting the ‘address for correspondence’ for tracking purpose. Banks may consider top-up loans to students pursuing further studies within the overall eligibility limit, with appropriate re-scheduling, subject to the taking of required security. The co-obligator should be parent(s)/guardian of the student borrower. In case of a married person, co-obligator can be spouse or the parent(s)/parents-in-law. “No due certificate” need not be insisted upon as a pre-condition for considering education loan. However, banks may obtain a declaration/an affidavit confirming that no loans are availed from other banks. Loan applications have to be disposed of within a period of 15–30 days, but not exceeding the time norms stipulated for disposing of loan applications under priority sector lending. In order to bring flexibility in regard to eligibility, margin and security norms, banks may consider relaxation in the norms on a case-to-case basis, delegating the powers to a fairly higher level authority.

3.2

Education Loan Schemes of Select Banks

Each commercial bank has the discretion to make changes suiting the convenience of the students and parents within the framework of guidelines issued by IBA. Hence, there are moderate variations among commercial banks in respect of procedures. In the following paragraphs, education loan procedures of select public sector banks and private sector banks are discussed. Under the category of public sector banks, Andhra Bank, Corporation Bank, State Bank of India and State Bank of Travancore are covered, and as a private sector bank, South Indian Bank is discussed in detail.

Education Loan and Inclusive Growth: India in a Comparative Perspective

3.2.1

41

Education Loan Scheme – Andhra Bank

Loan is available for both Indian and foreign education, and loan application form is available in its website. The form can be submitted online as well as offline. If the loan amount exceeds Rs.750,000, appropriate security acceptable to the bank is to be furnished. The education loan scheme of Andhra Bank is known as Dr. Pattabhi Vidya Jyothi Educational Loan Scheme. Under the scheme, own contribution or self margin is not required up to Rs.750,000; 5 percent for loans above Rs. 750,000 for Indian study and 15 percent margin for foreign study. Scholarship or any other assistantship can be included in the margin money. If loan amount exceeds Rs750,000, appropriate security acceptable to the bank is to be furnished. The revised Model Educational Loan Scheme (2011) covers only merit channel seats for the courses. Admissions through management quota are outside the purview of IBA Model Scheme on Educational Loans for Higher Studies. However, the bank may consider sanction of loans to students securing admissions under management quota with a suitable collateral security of not less than 150 per cent value of the sanctioned limit irrespective of the quantum of loan, whether it is below Rs. 750,000 or above Rs. 750,000 (www.andra bank.com).

3.2.2

Education Loan Scheme: Corporation Bank

The Corporation Bank follows the IBA Model strictly in regard to the eligibility criteria as well as courses and fees. According to the guideline of the bank, loan applications have to be disposed of within a period of seven days of receipt of application complete in all respects.2The loan has to be repaid within a maximum period of 10 years after the completion of the repayment holiday period. The repayment holiday period is course period plus 12 months, or 6 months after getting job, whichever is earlier. The loan is taken jointly by the student and parent or guardian of the student. In case of married person, co-applicant can be spouse or the parent(s)/parents-in-law. The loan documents should be executed by both the student and the joint borrower.

2

It may be noted that a delay in the processing of a loan application may be due to the time taken by the borrower for completing the documents required by the bank.

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As it is evident from Table 3.2, the maximum loan amount for foreign study is Rs.2 million with a 15 percent margin contribution by the student/parent. Table 3.2 Education Loan Scheme of Corporation Bank: Amount, Margin and Security Purpose

Amount of loan (Rs.) Up to 2 million

Margin%

Security

Remarks

15

Scholarship and assistantship are included in the margin

For Study in India

Up to 750,000

Nil

For Study in India

Above 750,000

5

Co-obligation of parents/guardian together with tangible collateral security along with assignment of future income of the student Co-obligation of parents/guardian;no other security is required. Co-obligation of parents/guardian together with tangible collateral security along with assignment of future income of the student

For Study Abroad

Scholarship and assistantship are included in the margin

Source:http://www.corpbank.com. Note: (1) The security can be in the form of land/building/ government securities/public sector bonds/units of UTI, NSC, KVP, life insurance policy, gold, shares/mutual fund units/ debentures, bank deposit in the name of student/parent/guardian or any other third party with suitable margin. (2) Wherever the land/building is already mortgaged, the unencumbered portion can be taken as security on second charge basis provided it covers the required loan amount with prescribed margin of 35 per cent. (3) In case the loan is given for purchase of computer, the computer has to be hypothecated to the bank.

Education Loan and Inclusive Growth: India in a Comparative Perspective

3.2.3

43

State Bank of India: Loan Schemes

State Bank of India levies interest rate in line with RBI guidelines. According to the guidelines of RBI, which is also given in IBA Model, rate of interest for education loan up to Rs.750,000 should not exceed PLR. While for amounts exceeding Rs.750,000 the interest rate should be PLR plus 1 percent. As interest for education loan is linked to PLR, State Bank of India revises interest for education loan in line with PLR changes. However, three slab rates are levied according to the amount of the loan, and interest is kept at the lowest rate for the first slab, that is, up to the loan amount of Rs.750,000. The highest interest is charged for the highest slab of above Rs. 750,000. Neither guarantor nor security is required for taking education loan up to Rs. 400,000. Between Rs.400,000 and Rs.750,000, a guarantor is required for availing education loan. For a loan amount exceeding Rs.750,000, collateral security needs to be furnished (Table3.3). Table3.3 Education Loan Scheme of SBI: Guarantee and Security Amount Up to Rs.750,000 Above Rs.750,000

Guarantee No

Security No

Yes

Yes

Source: http://www.statebankofindia.com.

3.2.4

State Bank of Travancore: Loan Schemes

State Bank of Travancore (SBT) has a large network of 714 branches, out of which 580 are in Kerala. It is the leading bank in Kerala, which provides the largest size of education loan in the state. During 2008–09, it sanctioned education loan to the amount of over Rs. 449,3.80 million, registering 33.3 percent of total education loan sanctioned by commercial banks in Kerala. This amount was sanctioned to about 15,163 loan applicants, registering 32 percent of education loan applicants in the state.

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3.2.5

Chapter Three

The South Indian Bank: A Detailed Analysis of Loan Schemes

The South Indian Bank (SIB), a Kerala based private sector bank having over 500 branches all over India, has three education loan schemes, namely education loan scheme for the financially poor but meritorious student, the Vitjnan Pradhan Scheme and the SIB excellence scheme. The details of the three schemes are listed below:

Educational loan scheme for the financially poor but meritorious student: This loan can be given only to the following courses for studies in India: x School education up to plus-2 stage. x College education up to graduation. x Post-graduate education. x Professional courses including CA, ICWA, CFA, etc. x Computer certificate courses of reputed institutions accredited to Department of Electronics or institutions affiliated to a university. x Courses offered in India by reputed foreign universities. x Evening courses of approved institutions x Other courses leading to diploma/degree, etc., conducted by colleges/universities approved by UGC/ government/AICTE/ AIBMS/ ICMR/etc. In addition, for the following courses to be studied abroad, this loan can be availed: x Job-oriented professional/technical courses offered by reputed universities at graduate level. x MCA, MBA, MS, etc., at post-graduate level. x Courses conducted by CIMA, London; CPA in the United States; etc. Moreover, the student should be an Indian national and he or she should secure admission to professional/technical courses through an entrance test or a selection process in India or should get admission to foreign university or institutions. For studies in India, the maximum permissible loan amount is Rs.750,000, while it is Rs.2 million for studies abroad. This amount will

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be decided based on the need, subject to the repaying capacity of the parents or students with margin. Up to Rs.750,000, margin is not required. However, above Rs.750,000, 15 percent margin is required for studies in India and 25 percent for studies abroad. Scholarship can also be included in the margin. The rate of interest for this loan is a fixed rate at PLR plus term premium minus 2.50 percent (subject to floor rate of 12 percent, and PLR as on 30 October 2008 was 16 percent). However, penal interest of 2 percent will be charged for loans above Rs.200,000 for the overdue amount and overdue period. In addition, there is 1 percent interest concession if the interest is serviced during the study period. Processing or upfront fees will not be charged. Up to Rs.750,000 no security is required. For above Rs.750,000, the required is a collateral security of suitable value or co-obligation of parents/guardians/third party along with the assignment of future income of the student for payment of installments. The collateral may be land/ building/government securities/public sector bonds/units of UTI, NSC, KVP, LIC policy, gold, shares or debentures, bank deposit in the name of student/parent/guardian or any other third party with suitable margin. In case the loan is given for purchase of computer, the same is to be hypothecated to the bank. There will be a repayment holiday or moratorium for the course period plus one year (which may be extended up to two years in case the student is not able to complete the course within the scheduled time), or six months after getting job, whichever is earlier. The loan is to be repaid in 60 months after the holiday. The accrued interest during the holiday period is to be added to the principal and repayment as EMI. The loan should be disbursed in stages according to requirement for payment of tuition fees, hostel fees, purchase of books, equipment, etc. Bills or receipts for payments should be obtained. It should be noted that loan should not be granted for the payment of capitation fee or donation. In case the student fails in any annual or semester examinations during the course of the study, continuance of the loan should be approved by the sanctioning authority. In case a student discontinues the course, the borrowers should immediately report the matter to the bank and the outstanding loan amount should be repaid immediately. The applicant student should obtain at least 55 percent marks in all examinations, including the qualifying examination. The Deputy General Manager or the Assistant General Manager in charge of the bank’s Regional Office has the discretion to consider cases with 50 per cent marks too. Only regular students will be eligible for finance under this scheme. The borrower should submit

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application with individual worth statements of all the signatories and relevant record or proof for financial requirements for the entire course. Tariff of fees, refundable deposits, hostel fees, details of eligible stipend, etc., should be certified by the educational institution. The purchase of books and instruments should be certified by the class teacher. Branches should collect the copy of the mark sheet/progress report authorized by the institution on a half-yearly basis and should watch for consistency of marks. Application for education loan received by a bank official should not be rejected without the concurrence of the next higher authority.

Vitjnan Pradhan Scheme of South Indian Bank This scheme is meant exclusively for students desirous of pursuing professional courses. The eligible courses and the amount of loan are given in Table 3.4. It should be noted that the eligible amount shown in Table 3.4 is the maximum permissible amount for the entire course. However, release of the loan amount is need based. Repayment period will start from one year after the qualifying examination or six months after obtaining employment, whichever is earlier. For overseas study, the holiday is restricted to a fixed six months after the qualifying examination. Loan should be repaid in 60 equal monthly installments after the holiday or moratorium. The rate of interest for this loan is also a fixed rate at PLR plus term premium minus 2.50 percent. Under this scheme, roll-over facility is available for continuing education. If the student, after availing this loan for one stage of education, wishes to continue education and avail finance, the loan for the next stage of education can be considered. In such cases the eligible amount for the second stage plus the outstanding amount in the existing loan has to be sanctioned, provided all the conditions of the loan scheme including security and margin norms are fully satisfied and there is consistency in marks obtained in examinations. The existing loan should be thus closed while availing the fresh loan. The repayment period should be extended as applicable to the second loan. The sanctioning powers will be applicable to the higher loan amount. This process shall be continued.

Education Loan and Inclusive Growth: India in a Comparative Perspective

Table 3.4 South Indian Bank’s Vitjnan Pradhan Education Loan Scheme: Eligible Courses and the Amount of Loan Course (1) All Government-recognized Diploma Courses Engineering Degree including B.Tech Biotechnology Engineering PG MCA M.Sc, Biotechnology Computer Courses Recognized by the Central Electronics Department (CED) Medical Degree Medical PG Management Courses – Fulltime MBA, MBM, PGDM Course ACA, ACS, ICWA BDS B.V.Sc & A.H M.V.Sc B.Sc. Agriculture M.Sc. Agriculture B.Sc. Nursing B. Pharm. Bachelor of Physio Therapy Overseas Studies Source: South Indian Bank Ltd.

Duration of the Course (Year) (2) Not less than 0.5 4

Loan Amount: Upper Ceiling (Rs.) (4) 100,000

2 3 2 1–2

300,000 200,000 100,000 100,000

5 2–3 1–3

500,000 300,000 450,000

Duration of the Course (Year) Approximately 3 4.5 4 2 4 2 4 4 4 1–3

Loan Amount: Upper Ceiling (Rs.) 100,000

300,000

300,000 200,000 100,000 150,000 100,000 250,000 200,000 250,000 2,000,000

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South Indian Bank—Excellence: Educational Loan Scheme This scheme is to attract the talented youths pursuing professional studies in the top prestigious educational institutions in India to the South Indian Bank. Students obtaining admission through general merit in premier educational institutions in the country are eligible for this scheme. Only 10 branches are notified as the nodal branches for disbursing this scheme of loan and other branches are expected to send recommendations to their nearest nodal branch or regional office of the bank. The maximum amount of loan under this scheme is Rs.1 million, subject to actual requirement, whichever is lower. The loan is given for meeting fees payable to college, including examination, library and laboratory fees, and the following: (a) Caution deposits and refundable deposits (not exceeding 10 per cent of tuition fees for the entire course) (b) Cost of study books, equipment and computers (c) Cost of uniform (d) Hostel boarding and lodging (e) One-time premium of life insurance policy (without maturity return) covering the entire period of loan with sum assured equal to the loan amount Margin money is not required up to Rs. 750,000. However, for a loan above Rs. 750,000, 5 percent is required while scholarships or assistantship can be included in margin. Moreover, margin may be brought in on a yearto-year basis as and when disbursements are made. In the case of major students, the borrower has to be the student himself or herself along with at least one of his or her parents as guarantor. Net-worth of the guarantor/s should not be less than the loan amount. If parents are not alive, a close relative should be guarantor. In the case of minor students, one of the parents is to be the borrower along with other parent/close relative as guarantor. Collateral security is not to be insisted upon and only guarantee by one of the parents/close relative is envisaged. A life insurance policy (with a single premium) for an amount equal to the loan and of same tenure is to be assigned in the bank’s name. Repayment will start from one year after the qualifying examination or six months after obtaining employment, whichever is earlier. Loan should be repaid in 60 EMIs after the holiday or moratorium and there is no prepayment penalty. Interest during the holiday period may be funded or remitted as per option chosen by the borrower. The rate of interest is fixed at 9 percent without a reset clause. Only Indian nationals including non-resident Indians (NRIs) are eligible. Loan should not be granted for the payment of capitation fee or

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donation. A list of students financed by SIB is to be furnished to the educational institution. If possible, an undertaking is to be obtained from the institution that in case a student discontinues the course, the institution will immediately report the matter to the bank and the caution deposit or refundable deposit, if any, will be paid to the bank. Branches should collect the copy of the mark sheet or progress report of the student/borrower semester-wise and should watch for consistency of marks. In case the student fails in any annual or semester examinations during the course of study, continuance of the loan should be reviewed by the sanctioning authority. Table 3.5 South Indian Bank’s Excellence Education Loan Scheme: List of Eligible Educational Institutions Sl.No. 1 2 3 4 5 6 7

Educational Institutions All IIMs for 2-year Post Graduate/Post Graduate Diploma in Management programmes All IITs for 4-year Under Graduate/2-year Post Graduate programmes National Institute of Design (NID), Ahmadabad, for 4-year Under Graduate/2-year Post Graduate course Indian School of Business (ISB), Hyderabad, for 2-year Post Graduate programmes National Institute of Fashion Technology (NIFT) for 4-year Under Graduate/2-year Post Graduate course Indian Institute of Foreign Trade, Delhi and Kolkata, for 2year Post Graduate programmes Business schools ( other than those listed above ) appearing in the top 20 ranking of the National Assessment & Accreditation Council(NAAC) or the All India Management Association (AIMA)

Source: South Indian Bank Ltd.

Our analysis shows that South Indian Bank, a Kerala-based private sector bank with branches all over India, has an outstanding amount of education loan at Rs. 150.2 million against Rs. 1,192.825 million of Federal bank, Rs. 325.432 million of Catholic Syrian Bank as on 31 March 2008. It is important to note that the loan recovery performance is quite good. Only 2.76 percent is non-performing loan (Table 3.6).

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Table 3.6 NPA Position of South Indian Bank: Educational Loans as on March 2008 Education Loan Outstanding(Rs.in Millions-)

Non-Std assets/ Nonrecovery(Rs.in Millions)

India

290.2

8.0

Non- Performing Asset (NPA) as % of Outstanding Loan 2.76

Kerala

150.2

6.1

4.06

Source: The South Indian Bank Ltd.

3.3

Implementation of Schemes of Education Loans: Operational Issues

3.3.1 Commercial banks in India face various kinds of operational problems in managing education loan. These are mainly related to identification and selection of students for disbursing loans. Mounting arrears and continuous default in the repayment of loan are other major areas of concern for the banks. About 77 percent of bank officials covered under the field survey have reported several cases of default in education loan in their respective branches. Several beneficiaries are unable to secure a good job for the repayment of the loan. For instance, loan beneficiaries in the nursing sector are not in a position to service even a loan of Rs.300,000, except for those who bag jobs abroad or in government hospitals or reputed private hospitals in India. Moreover, the products of most of the private nursing institutions in Karnataka and Andhra Pradesh are not in a position to secure job abroad or in government hospitals or reputed private hospitals in India as most of these private institutions do not have the infrastructure or faculty to provide good quality nursing education. According to 95 per cent of bank officials who responded to our questionnaire, banks should extend education loan, not simply based on fee structure, but considering income generation capacity and job potential. According to a significant section of bank officials education loan schemes have become a boon and a stepping stone to the throne of success. However, these loans have turned out to be a bane at the end of

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course period for many students. Recovery notices from banks have started haunting them while struggling with unemployment or poorly paid jobs for the rest of their lives. According to an officer of State Bank of Travancore in Trichur district of Kerala, a large number of self- financing colleges are offering fee and other concessions and discounts to students to pursue higher education. As a result, several students who are unable to secure a seat on the basis of merit in any government-owned or government-aided colleges take admission in self-financing colleges. As educational loans of up to Rs.400,000 do not require any collateral security, students become enthusiastic in joining higher education courses, but several of them cannot find a job to repay the loan. In the field of medical education several such experiences are reported by bank officials in various states. After paying hefty donations, students who secure admission to MBBS courses in self-financing colleges ranging from Rs.2.5 million to Rs.5 million get the course fees funded through education loans. Several of them who find the course boring or incomprehensible face difficulties in passing examinations and even if they pass after years, become unable to secure a good job with a pay large enough to service the surmounting education loans. Each year, several students seek education loans and study in foreign universities. By appointing recruiting agents in India these universities canvass students. Many students, who take up to Rs.2 million as loan for these courses, especially medical courses, find themselves in a debt trap after the completion of the course. Moreover, the salary offered by Indian hospitals in the initial days for an MBBS qualification is insufficient to repay the loan. Several cases of cancellation of affiliation of colleges have been reported by the students, their families and the lenders. Usually banks restrict loans to courses approved by government, AICTE, UGC or a university. In some cases, university approvals are given after annual inspection subject to certain conditions like minimum student intake, good infrastructure, etc. It is a matter of concern that some private education institutions try to manipulate the system. For instance, several nursing institutions in Karnataka and Andhra had resorted to malpractices in admitting students in 2004–05. During field survey, some of the bank officials have reported that student loan applications were accompanied by false declarations and approval certificates provided by the institutions. Agents of these private institutions helped students, mostly coming from rural areas, in availing education loans to meet expenses including fees. In most cases, fees and other expenses were inflated by the institutions. Moreover, students were given false promises of foreign jobs after

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completion of the nursing courses. Since these institutions were mostly new and without adequate facilities, producing good quality nursing students to meet the requirements of foreign placement became difficult. According to an officer of State Bank of India in Mumbai, several courses like animation, fire and safety, design, fashion technology and marine courses are promoted by institutions highlighting the success stories and statistics of future requirements in those streams. These courses are very expensive and, at times, banks are compelled to approve such courses. But in reality, success stories are very few in number and a large number of students become job hunters later, vying for the scanty positions available. Another risk for banks is giving education loans to students of colleges or institutions with temporary affiliations and recognitions. The affiliations of these colleges may be cancelled midway or the mismanagement in the institution may lead to legal issues. In such situations students and lenders will be left in the lurch in the middle of the academic year. Another issue is the high interest component of education loan. For courses with long duration, students prefer interest holiday up to course completion. Holidays are subject to a maximum of 6–12 months after course or getting job whichever is earlier. Say, for an engineering course after a five year period, the accrued debt for a student who has taken a loan of Rs.400,000 will be double the loan amount. The student will have to pay an EMI of about Rs.20,000 to service the debt afterwards, which means a minimum of Rs.30,000 should be the salary to maintain a reasonable standard of living. Very few students get such high salaries in the initial years and subsequently the debt burden of families become high. Irregular or non-repayment of loans is another area of concern for all the commercial banks. Though the current level of NPA is not alarming, in the near future it is likely to shoot up, given the high amount of unsecured education loan disbursed since 2003–04. According to the feedback received from 52 percent of the respondents under the category of bank officials, NPA is actually much higher and in the official reporting most of the banks have not yet started reporting many non-performing education loans. A bank official in Kerala shared his varied experiences in dealing with loan applications of nursing students. Several nursing institutions in Kerala and Andhra Pradesh had resorted to many forms of malpractices during 2003–05. There were several cases of loan applications accompanied by false declaration and the institution’s approval certificates. He expressed concern that a “subprime education loan crisis may take place in Kerala in the near future”.

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3.3.2

53

Risk Factors as Perceived by Lenders

Most of the commercial banks feel that sanctioning education loan without collateral securities is a high-risk affair. The feedback from bank officials show that bankers often sanction education loans under duress of social obligations, pressures from politicians and local parties, and threat of student agitations and suicides. Knowing fully that they are compromising on commercial judgement, they sanction loans waiving collaterals. Students are aware of their right to demand loans up to Rs.750,000 without collateral. Hence banks are left with no option for recovery at the end of the course if the student fails to keep up his/her part of obligation. As discussed earlier, malpractices of some educational institutions in the private sector can become another serious threat faced by lenders.

3.3.3

Operational Problems and Role of SLBC

State Level Bankers’ Committee (SLBC) is an inter-institutional forum at the state-level, set up under the Lead Bank Scheme as per guidelines of the Reserve Bank of India. This forum ensures co-ordination between government and banks on matters pertaining to banking development. The major focus of SLBC is to ensure the effective implementation of development programmes in the areas of poverty alleviation, employment creation, financial literacy, etc. SLBC of each state plays a significant role in dealing with many operational problems of education loan. As a forum which takes up issues related to credit deployment raised by member banks or state government authorities, SLBC deals with issues related to student loan and resolve them. It analyses the deposits and advances of banks and reviews the credit deployment position. It serves as a focal point of the banking system for interacting with the concerned state government authorities. SLBC liaises with the Secretary (Institutional Finance) of the respective state for contact in matters relating to the implementation of lead bank schemes or government sponsored schemes. It also serves as the clearing house in respect of inter-institutional coordination problems. It consolidates all the district credit plans and prepares a state credit plan, launches it and monitors the progress of its implementation. It regularly reviews the district credit plans and their implementation. It engineers appropriate follow-up action to ensure the plan’s implementation within the time schedule. Although student loan is not a state sponsored scheme, governments of each state takes interest because of its increasing significance as a source of financing higher education. About 77 percent of

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the respondents under the category of bank officials reported in our field survey that SLBC meetings provide a useful forum for reviewing the flow of credit to students for higher education, assessing the performance of each bank and sharing the experiences. It maintains liaison with various government departments on behalf of banks in the state and represents problems of the member banks to the government for solution. The record of the deliberations on education loan held during SLBC meetings in Kerala during 2008–11 shows that serious and fruitful discussions were held during the meeting. As is evident from the discussions in one of the SLBC meetings in Kerala, quite often the interests of commercial banks and government, two stakeholders in the student loan system, become conflicting. While the representative of State Bank of Travancore had argued for imposition of some restrictions on providing student loan in the context of misuse by some nursing institutions, the representative of Government of Kerala opposed it and advocated for a cautious step on this issue in one of the SLBC meetings (Box 3.1). As per the SLBC guidelines, currently educational loans are extended only to those students admitted to professional courses through merit quotas. Students who obtained admission through management quota are denied educational loans which in turn have created a huge hue and cry among parents and also among politicians. In fact, Shri Kodikunnil Suresh, a Member of Parliament from Kerala, raised this issue in the Lok Sabha (lower house of Parliament) and demanded that the central government intervene in this matter as these guidelines of the SBLC are against the spirit of RBI instructions. He actually criticized the SLBC for limiting student loans to those who secured admission through merit quota and for those who got job guarantees (Mathrubhumi, 9 August 2012).

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Box 3.1 SLBC Meeting: Opinion of Government Representative vs Banks’ Interest Shri. S.M. Vijayanand, IAS, Principal Secretary, Government of Kerala, in a meeting of SLBC contradicted some of the views and concerns of bank representatives and his concerns and suggestions are listed below: The issues related to education loan should be discussed in detail owing to the sensitivity of the issue in Kerala. Instead of imposing restrictions on education loans to nursing students, a realistic and futuristic view should be taken on all issues related to sanction of education loan to them as nurses bring the largest amount of foreign exchange to Kerala. It is a fact that some of the institutions in Karnataka misused the education loan scheme by increasing the fee structure artificially. However, this bad experience should not lead to taking a hasty decision related to imposing more conditions and restrictions on education loan to the needy, especially nurses and teachers who bring a considerable size of foreign exchange. Liberalized education loan is quite relevant to Kerala. It is a matter of concern that IBA has recently insisted that education loan should be sanctioned based on the fee structure of state and central governments. This step can cause serious problems as the fee structure of state and central governments is kept at abysmally low levels. Source: Kerala SLBC records.

SLBC is a good platform for sharing experiences, discussing problems and formulating suitable strategies. IBA has issued guidelines on various aspects of education loan to its member banks. For example, its guidelines say that loan applicant should be an Indian national and the person should secure an admission for an approved course through a merit-based selection process or entrance test. It issued a guideline on 28 September 2008 under the reference number SB/10-21/1291 asking its member banks to sanction loan considering the fee structure of educational institutions run by central or state governments. SLBC also issues guidelines. For instance, it had issued a guideline insisting that the nearest branch should sanction student loan. This guideline was issued in view of the fact that student loan in India is not a government-sponsored one and service area approach is not applicable. About 27 percent of bank officials covered under the survey have reported that the SLBC guideline regarding the sanctioning of loan by nearest branch has created problems to the banks

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like State Bank of Travancore (SBT) that are disbursing the maximum amount of education loans. According to these respondents, many private sector banks and even some nationalized banks try to avoid giving education loans based on this guideline. Since SBT has a wide branch network in Kerala, branches of other banks in the same area are in a position to tell student borrowers from low income strata to approach a nearby branch of State Bank of Travancore. One SBT official says: “Several branches of private sector and nationalized banks have tendency to direct education loan applicants to SBT and so it receives the maximum number of loan applications.” As a result, SBT with the 15 percent share of the total bank network in Kerala disburses 40 percent of bank loan in the state. While the operational issues from the point of view of banks need some urgent attention, the significance of the education loan as a tool of financing for higher education by meeting the interest of students from poor/low income families should not be overlooked. As discussed in Box 3.1 experiences of banks should not lead to taking a hasty decision imposing more conditions and restrictions on education loan to the needy, especially nurses and teachers who bring a considerable size of foreign exchange. Liberalized education loan to poor/low income sections is quite relevant to all Indian states.

3.4

Disbursal of Education Loan in India: Upward Trends

Despite education loan being not very popular in India, the disbursement of education loan has recently witnessed an increasing trend. According to IBA data, a total educational loan of Rs. 216,360million was disbursed by all the PSU banks in India till June 2008. In 2007–08 alone the disbursement of education loan by all the PSUs was Rs. 56,350million against Rs. 27,820million in 2004–05 (Figure 3.1)

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Figure 3-1 Disbursal of Student Loans by PSU Banks in India: 2005–08 (Rupees in crore [10 million])

Disbursal of Student Loans by PSU Banks in India: 2005-2008 6000 5000 4000 3000

Amount of Loan Disbursed

2000 1000 0 2007-08

2004-05

Source: Indian Banks’ Association and http://www.business-standard.com.

Data provided by the Ministry of Finance reveals that students from southern states of India were well ahead of the remaining regions in availing student loans from 27 public sector banks during April– September 2008. During this period, the total disbursement of student loan by 27 PSU banks is Rs. 901.47 crores [Rs. 9,014.7 million](Table 3.7). “In fact through the last three years as well, Andhra Pradesh, Tamil Nadu, Karnataka and Kerala have retained the top four slots, in that order, in terms of education loan disbursement by the top10 PSU banks in the country” (Times of India, 1 November 2008).

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Table 3.7 Half Yearly Disbursal of Education Loan by 27 PSU Banks: Select States (April–September 2008) State/Regions Southern States (Andhra Pradesh, Karnataka, Kerala and Tamil Nadu) UP Bihar Other States Total

Amount of Educational Loan(in Rs.Million) 6,310.3

%of Total Disbursal

460.8 176.4 2,067.2 9,014,7

5.11 1.96 22.93 100

70

Source: Data from 27 Public sector banks provided by the Ministry of Finance, reported in Times of India, 1 November 2008.

As shown in Table 3.8, the amount of education loan outstanding at the end of March 2008 was Rs. 30,630millionfor Andhra Bank. During 2007– 08 an amount of Rs.9,460 million was disbursed while an amount of Rs. 10,130million was projected for the year 2008–09. Table 3.8 Education Loan by Andhra Bank Item

Year

Outstanding amount at the end of March 2008 Disbursement of loan

Up to 31 March2008

Amount (in Rs.Million) 30,630

2007–08

9,460

2008–09

10,130

Projection education loan

of

Source: Andhra Bank at http://www.andhrabank.in.

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Disbursement of Education Loan: March 2012 As on 31 March 2012 total outstanding education loan disbursed by all government-owned and scheduled banks was Rs. 490,690million. About 54 per cent of education loans were availed by students of the four southern states of India; Tamil Nadu, Kerala, Andhra Pradesh and Karnataka. It is interesting to understand that 4 states among 35 states and union territories account for 54 per cent of the total education loan disbursement in India. Tamil Nadu has the largest outstanding loan of Rs. 116,250million followed by Kerala with Rs. 61,800million while Andhra Pradesh and Karnataka accounted for Rs. 52,150million and Rs. 34,798 million respectively(Hindu Business Line, 26 August 2012, New Delhi). By all accounts, there has been a substantial increase in the disbursal of education loan in India in the last 2–3 years. However, states from the southern region of India have the larger share in the total disbursal of education loan in the country. Till 2009, Kerala was considered as the leading south Indian state in the disbursement of education loan. Among various Indian states, Kerala had a prominent role in using bank loan as a tool for financing higher education as about 20 percent of total loan distributed in India is from the state (Bhattadiri, 2008). About Rs.22,500 million was distributed among students in Kerala in 2007, registering an increase of 275 percent from around 60,000 million in 2003. This significant change was due to the liberalization of conditions of public sector banks as a response to the public outcry against the bank’s policy after a suicide by a girl student whose loan application was rejected by a bank in July 2004. Another reason for this spurt in the loan disbursal was the opening of several self-financing colleges throughout the state of Kerala. Tamil Nadu has overtaken Kerala as the state with the largest outstanding loan in 2012.

Disbursement of Education Loan in India: Interest Rate The guidelines of RBI stipulate that banks cannot charge more than PLR for loans of up to Rs.400,000. For loans above Rs. 400,000, the maximum rate cannot be more than 1 percent above PLR. As is evident from Table 3.9, State Bank of Travancore’s interest rate with effect from 10 November 2008 is 12.5 percent for loans of up to Rs.400,000 and 13.25 per cent for loans above Rs.400,000.

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Table 3.9 State Bank of Travancore: Education Loan Interest Rate with effect from 10 November 2011 Loan Amount Up to Rs.750,000 Above Rs.750,000

Nature of Loan Unsecured Loan Secured Loan

Interest (%) 14.25 15.00

Source: http://www.statebankoftravancore.com.

Interest rate on education loan in India varies with changes in the prime lending rate in the country. However, for a loan amount above Rs.750,000, some banks levy a high interest rate for unsecured loan and a lower rate for secured loan (see Table 3.10). Table 3.10 Rate of Interest of Select Banks on Education Loan in 2012 Amount in Rupees

Secured/Unsec ured Loan

Corporatio n Bank Interest Rate (%) (w.e.f. 26 September 2012)

State Bank of India Interest Rate (%) (w.e.f. 27Februar y 2012)

Up to 400,000 Above 400,000 and upto 750,000 750,000 and above

Unsecured Loan

11.65

13.50

State Bank of Travancor e Interest Rate (%) (w.e.f. 14August 2009) 14.25

Unsecured Loan

12.65

13.25

15.00

Secured Loan

12.15

12.00

15.00

Source: http://www.corpbank.com andhttp://www.statebankofindia.com.

3.5 Availing educational loans is a tough task for students in India. The banks take a highly commercial approach, sticking to norms and rules, despite Government of India’s instruction to relax and popularize education loans. It is a fact that several banks have recently changed their approach, being more liberal while sanctioning education loans of smaller

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amounts. For higher amounts and loans for students to pursue higher studies in foreign institutions, banks follow tight rules. Though Government of India has taken certain steps to popularize education loan as tool for financing higher education, Indian education loan scheme is not a government-sponsored or government-supported one. Hence, credit needs of students from poor/low income families are not met. The State Level Bankers’ Committee (SLBC) of each state plays an important role in dealing with many operational problems of education loan. Commercial banks in India try to keep the non-performing loan at a minimum level by reducing loan exposure to lower income and below poverty level (BPL) families.

CHAPTER FOUR SOCIO-ECONOMIC ANALYSIS OF EDUCATION LOANS IN INDIA AND ITS APPLICABILITY TO DEVELOPING COUNTRIES In this chapter various socio-economic impacts of education loan are discussed in detail. Using the field survey data, it is examined whether the education loan facility reaches target beneficiaries or not, and whether banks are insensitive to the needs of the poor students or not. The role of loan mechanism in promoting the inclusion of excluded communities and minorities in availing higher education is focused. The gender aspect of student loan is also discussed. Case studies of various categories of loan beneficiaries are narrated in the chapter. These cases include descriptions of specific issues and experiences related to foreign study loan, recognition of a professional institute in availing loan and a poor/low income family’s difficulties in availing education loan. These case studies provide insight into the risk factors as perceived by the lenders as well as problems faced by students in availing education loan.

4.1

Courses Funded

The results of the field survey show that 78.25 percent of beneficiaries had taken education loan for financing professional courses. These include medical, engineering, MBA and other job-oriented courses such as fashion designing (Table 4.1). While medical courses include MBBS, MD, nursing and laboratory technicians, engineering courses cover a wide range of branches ranging from computer, IT to mechanical. Fashion designing courses include various subcategories such as general designing, communication designing, furniture designing and interior designing. About 31 percent of respondents had taken loans for an MBA course and 14 percent for nursing. As is evident from Table 4.1, the distribution of loan beneficiaries witnesses substantial state level variations. The statewise data shows that 43 percent of loan beneficiaries from Kerala availed loans for studying nursing while 8 percent for other medical courses, making medical courses the most attractive in terms of demand

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Table 4.1 Disbursal of Loan: Course Pattern (%)

Nursing Other Medical MBA Other Professional (excluding medical and MBA) General (Nonprofessional) Total

Kerala

Maharashtra

Orissa

UP

All

43 8 13 14

3 12 39 22

2 14 38 26

8 19 32 20

14 13.25 30.5 20.5

22

24

20

21

21.75

100

100

100

100

100

Source: Field survey.

Figure 4.1 Disbursal of Loan: Course Pattern (%) 50 45 40 35 30 25 20 15 10 5 0

Nursing

Other Medical

MBA

Other Professional (excluding medical and MBA)

Source: Field survey.

for education loan. In all other three states, the major portion of the loan was taken for MBA courses and other non-medical professional courses

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together. About 22 percent students had taken loan for general courses, both graduation and post-graduation. Out of all the loan beneficiaries under the field survey, just around 4 percent were from the category of students who had taken loan for financing studies abroad. Over 96 percent loan beneficiaries had availed the facility for education in India.

4.2

Selection of Beneficiaries

We have examined whether loan beneficiaries are primarily selected by commercial banks based upon the current income and wealth of the student’s family or expected earnings to the student from higher education. According to 83 percent of the loan beneficiaries, loan was sanctioned based on the family’s current income without considering expected earnings of the student. For about 7 percent of beneficiaries, education loan was sanctioned based on the expected earnings of the student. About 10 percent beneficiaries were unaware of the basis on which the loan was sanctioned (Table 4.2). Table 4.2 Sanctioning of Loan: Criteria Parameters Current income of student’s family Expected earnings of student from higher education Unaware of the criterion

Respondents(%) 83 7 10

Source: Field Survey.

4.3

Gender Dimension

According to our field survey results, 56 percent education loan beneficiaries were males (see Figure 4.3). The state-wise analysis shows that unlike the other three states, the majority of loan beneficiaries (56 per cent) were females in Kerala. In Kerala, a large number of female students had taken loan for nursing courses. In the state of Maharashtra, female students comprised 40 percent against 38 percent and 42 percent in Orissa and UP respectively.

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Figure 4.2 Education Loan: Gender Pattern (%) 80 60

Kerala

40

Maharashtra Orissa

20

UP 0 Male

Female

Source: Field Survey.

4.4

Repayment Pattern

Repayment of education loan is a major area of concern for beneficiaries as well as banks. About 42 percent of students reported that they were regular in the repayment. About 9 percent of respondents were defaulters, while about 25 percent were reluctant to reveal the information (Table 4.3). Table 4.3 Education Loan: Repayment Pattern (%) Regular repayment Defaulters Repayment is not yet due No response Total

Kerala 41

Maharashtra 44

Orissa 40

UP 42

All 41.75

7 30

9 25

8 20

10 26

8.50 25.25

22

22

32

22

24.50

100

100

100

100

100

Source: Field Survey.

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Table 4.4 Non-repayment of Loan: Reasons Reasons Unemployment Lack of adequate salary from the present employment Expecting a loan waiver scheme from the government in future No specific reason Total

% 15 45 12 28 100

Source: Field survey.

Figure 4.3 Non-repayment of Loan: Reasons

Unemployment 15% 28%

12%

Lack of adequate salary from the present employment

45%

Expecting a loan waiver scheme from the government in future No specific reason

Source: Field survey.

In regard to the reasons for the non-repayment of education loan, 15 percent respondents reported unemployment and 45 percent the lack of adequate salary from the present employment as reasons (Table 4.4). According to 12 percent of respondents, the main reason for the nonrepayment of education loan is the expectation of a loan-waiver from the

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government. Bank-wise analysis reveals that repayment is 98 percent in private banks and cooperative banks while it is 45 percent in public sector banks. It is also reported that all the private banks and cooperative banks insisted on the repayment of interest component of the loan during the course of the study against just 2 percent of public sector banks.

4.5

Loan Beneficiaries: Employment Pattern

As is evident from the Table 4.5, about 60 percent beneficiaries of education loan are employed and over 25 percent have been undergoing further education. Indeed, it is a matter of concern that over 11 percent education loan beneficiaries are unemployed. There are no significant variations in regard to the employment pattern of loan beneficiaries at the state level. Table 4.5 Education Loan: Employment Pattern (%) Employed Undergoing Further Education Unemployed Self Employed Total

Kerala 57 29

Maharashtra 62 24

Orissa 63 21

UP 58 27

All 60 25.25

11 3

9 5

12 4

13 2

11.25 3.5

100

100

100

100

100

Source: Field survey.

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69

Figure 4.4 Education Loan: Employment Pattern (%) 70 60 50 40 30 20 10 0

Employed Undergoing Education Unemployed Self Employed

Source: Field survey.

4.6

Profile of Loan Beneficiaries

The results of our sample survey show that over 68 percent loan beneficiaries are from general categories against 8 percent scheduled castes (SC)/scheduled tribes (ST) and over 23.3 percent other backward castes (OBC) (Figure 4.5). Figure 4-5 Education Loan Takers: Caste Category (%) 80 60 40 20 0

Source: Field survey.

General/Others SC/ST OBC

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The analysis of the religious background of the loan beneficiaries witnesses significant state-level variations. While the single largest group is Christians in Kerala, Hindus are the majority in all the other three states (Figure 4.6). In terms of the average of all the four states, Muslims are over 12 percent against 17 percent Christians and over 70 percent Hindus. It is significant to understand the educational background of the parents of students who availed education loan. About 36 percent parents have passed secondary and higher secondary schools, while over 24 percent are graduates (Table 4-6). Nine percent parents are post graduates, and over 7 percent are illiterates. Figure 4-6 Education Loan Takers: Religious Category (%) 100 80 60

Hindu

40

Muslim Chritian

20 0 Kerala Source: Field survey.

Maharashtra

Orissa

UP

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Table 4-6 Education Loan Takers: Education Qualification of Parents (%) PostGraduation Graduation Secondary and Higher Secondary School Primary School No Education Others and No Response Total

Kerala 11

Maharashtra 12

Orissa 7

UP 6

All 9

22 38

21 39

27 35

28 31

24.5 35.75

5

4

8

9

6.5

1

5

11

12

7.25

23

19

12

14

17

100

100

100

100

100

Source: Field survey.

Again, the background of the families can be explained in terms of the occupation of parents. About 30 percent parents are from agricultural background while just over 10 percent are attached to the industry sector. Another 38 percent parents earn their income from the service sector (Table 4.7). Table 4-7 Occupation of Parents: Education Loan Takers (%) Occupation of Parents Agriculture Industry Service Others Total

Kerala

Maharashtra

Orissa

UP

All

30 13 41 16 100

27 11 42 20 100

29 7 36 28 100

32 10 33 25 100

29.50 10.25 38.00 22.25 100

Source: Field survey.

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The average monthly income of families who availed education loan is next examined. It is found that middle and upper middle income groups share the major portion of the loan. As is evident from Figure 4.7, 11 percent families’ monthly income is in the range of Rs.1,000–5,000, and 14 percent families’ income is in the range of Rs. 5,000–10,000. While 22 percent families and 21 percent families have Rs.10,000–15,000 and Rs.15,000–20,000 monthly income ranges, respectively, 32 percent have above Rs.20,000. Figure 4.7 Education Loan Beneficiaries: Average Monthly Income of Families (%) 35 30 25 20

1000-5000

15

5001-10000

10

10001-15000

5

15000-20000

0

Above 20000

Source: Field survey.

It is also important to examine the parental income of beneficiaries of education loan using non-monetary indicators. Over 80 percent parents have properly built house while 27 percent families own car and over 96 percent use electricity as primary source of energy for lighting (Table 4.8). It is important to note that around 95 percent families own TV and over 77 percent have LPG (cooking gas) connection. Another interesting dimension is the availability of mobile telephone connections; over 88 percent families have mobile telephone connections. These findings reveal that a major share of beneficiaries of education loan belong to the middle class.

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Table 4.8 Education Loan Beneficiaries: Parental Income – Non-Monetary Indicators (%) Households with

Kerala

Maharashtra

Orissa

UP

81.25

87.1

78.1

76.4

Average of Four States 80.71

34 100

39 100

12 93

23 93

27 96.5

33.75

31.7

12.5

13

22.74

96.25

95

65.1

55.5

77.96

97.5 78

98 81

90 52.1

94 62.2

94.9 68.33

50.1

43.2

45

44.7

45.75

93.75

95

88

78.1

88.71

Properly built house/ apartment Car Electricity, as primary source of energy for lighting A generator or an inverter LPG (gas) connection TV Phone – landline STD (longdistance telephone) connection Mobile phone Source: Field survey.

The analysis of the rural–urban distribution shows that over 61 percent of loan beneficiaries are from urban areas. State-wise analysis reveals that over 46 percent beneficiaries are from rural areas in Kerala. However, in UP, just 34 percent are from rural background (Table 4.9). These figures show that urban families have benefited more from education loan schemes in India.

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Table 4-9 Education Loan Beneficiaries (%) Rural/Urban Rural Urban Total

Kerala

Maharashtra

Orissa

UP

46.5 53.5 100

38 62 100

37 63 100

34 66 100

Average of Four States 38.9 61.1 100

Source: Field survey.

We have also examined the monthly incomes of loan beneficiaries from their present job. It is found that over 28 percent has a monthly earning of up to Rs.10,000. However, about 58 percent of them earn in the range of Rs.10,000–30,000. Only about 2 percent have monthly earnings of above Rs.70,000 (Figure 4.8). Figure 4.8 Employed Education Loan Beneficiaries (%): Average Monthly Income 70 60 50 40 30 20 10 0

Source: Field survey.

Up to 10000 10001-30000 30001-70000 Above 70000

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4.7

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Size of Education Loan

The analysis of the size of education loan reveals that a majority (78.25 per cent) have availed an amount of up to Rs.400,000. While another over 17 percent have loans in the range of Rs.400,000–750,000, just about 5 percent beneficiaries have availed above Rs.750,000 (Figure 4.9). Figure 4.9 Size of Student Loan (%) 100 80 60 40 20 0

Up to Rs.4 Lakh Rs. 4 to 7.5 Lakh Above Rs.7.5 Lakh

Source: Field survey.

4.8Interest Rate on Education Loan (% of Beneficiaries) During the field survey, 14.13 percent of respondents reported the interest rate on education loan being below 10 percent. For the remaining 85.87 percent, the rate was in the range of 10–13 percent. In this context, we need to bear in mind that the interest rate is linked to Prime Lending Rate (PLR). Moreover, interest rate varies according to the size of loan. For instance, some beneficiaries from Maharashtra reported that they had taken loans of up to Rs.400,000 at 11.5 percent interest rate without any guarantee or collateral security from State Bank of India in 2004. Some other beneficiaries from the same state were charged by Union Bank of India at 10.75 percent interest rate for a loan of Rs. 390,000. Some respondents from Maharashtra had to pay 12.25 percent interest for student loans taken from private banks in 2004.

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4.9

Types of Banks

The results of our sample survey reveal that about 82 percent loan beneficiaries had availed student loan from public sector banks against 18 percent from private sector banks. The state-level variations in regard to the share of public sector and private sector banks are quite negligible (Figure 4.10). About 83 percent beneficiaries had availed loan from public sector banks in UP against 82 percent in Kerala, 81 percent in Maharashtra and 80 percent in Orissa. Figure 4.10 Education Loan Disbursal: Private and Public Sector Banks (%) 90 80 70 60 50

Private

40

Public

30 20 10 0 Kerala

Maharashtra

Orissa

UP

Source: Field survey.

4.10

Types of Educational Institutions

As is evident from the Figure 4.11, among the three types of education, the maximum number of students availed loan for government-owned educational institutions followed by self-financing institutions; while 59.75 percent beneficiaries availed loan for government-owned educational institutions, 33.25 percent availed the loan for self-financed

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educational institutions and 7 percent students for private-aided educational institutions. Figure 4.11 Education Loan Beneficiaries: Type of Educational Institutions (%) 80 70 60 50 40 30 20 10 0

Self Financed Public Private Aided

Source: Field survey.

4.11

Banks’ Preference for Foreign Education Loan

The results of the field survey show that banks are, by and large, enthusiastic in providing foreign education loan. Various reasons are attributed to this trend. The repayment level in this segment is quite high and students who avail this facility are mostly from middle income or upper middle income families who are capable of meeting all the requirements, especially collateral securities. Another inspiration for banks giving more foreign education loan is to canvass for NRI (Non Resident Indian) bank accounts and attract foreign exchange earnings. However, recently banks are taking certain precautions in providing foreign education loan because of the global economic crisis. About 13 percent respondents from Maharashtra and Uttar Pradesh reported that banks have been showing reluctance in clearing foreign education loan applications as the employment scenario has turned adverse due to the financial crisis in several countries.

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About 65 percent of respondents under the category of bank officials reveal that, in the backdrop of the global economic slowdown, banks have become slow and cautious in providing foreign education loan. Banks have now started levying higher interest rates and are insisting on collaterals and guarantees for job-specific courses like hotel management and pilot training. Banks have already gone slow in extending loans to courses relating to the aviation sector. Repayment capabilities of students going abroad have become a concern as most companies are exercising caution on entry-level salaries. However, about 5 percent respondents under the category of bank officials had not seen any slowdown in educational loans as the delinquencies were low despite the financial crisis in developed economies.

4.12Problems of Education Loan: Students’ Perspectives 4.12.1 Demand for Additional Loan (Top-up Loan): About 7 percent respondents from the student category revealed that they could not complete the course with the sanctioned loan amount and hence approached the same bank for extending additional finance. It is reported that out of the 7 percent, just 3 percent have received the additional finance or top-up loan during the course of study. However, nobody has reported that they could not complete the study due to the rejection of their application for top-up loan. 4.12.2 Multiple Education Loan from a Family: About 22 percent respondents raised concerns at the commercial banks’ approach towards a family when two or more children apply for education loan. Commercial banks treat the family as a unit when they receive loan applications for two student borrowers from a family in regard to security margin and repaying capacity of the parent/student. In such situations low income families faces much difficulties to provide adequate security and margin. 4.12.3 Education Loan and Scholarship: About 5 percent respondents who availed education loan had adjusted their scholarships as margin money for availing education loan. It shows that a small portion of students are in a position to combine scholarship income and loan to fund their education expenses.

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4.12.4 Source of Funding Education: The feedback from the field survey shows that sources of funding for those who have not availed loan for their higher education are varied. About 72 per cent used income of parents or other family relatives such as sisters, brothers, brothers-in-law and uncles. About 17 per cent got scholarships. While 2 per cent availed assistance from charitable institutions, the remaining 9 per cent were unwilling to reveal the source of funding of their education expenses. 4.12.5 Girls availing Education Loan: About 7 percent of respondents reported that the availing of education loan by girl students affects their marriage prospects. One respondent says, “If she has not closed her loan before the marriage, she may not get proposals for the fear of paying from her husband’s income.” 4.12.6 Gender Aspect of Education Loan: A certain section of female beneficiaries faces difficulties in continuing the burden of loan repayment after marriage. According to 28 percent respondents, girl beneficiaries have apprehension about the adverse impact of education loan on their married life. About 7 percent respondents reported full repayment of loan and premature closing of the loan account before the marriage of girl beneficiaries as a precaution to avoid any future family problems due to the financial liability. 4.12.7 Tax Exemption: Around 67 percent respondents in the field survey appreciated that the interest component of the EMI can be deducted from taxable income. However, 23 percent felt that tax exemption is not really an incentive for lower income groups. Some of them pointed out a disadvantage of the facility. In the early stage, interest component is higher while taxable income is less and at a later stage, the other way. This calculation is not in favour of students who avail loan. 4.12.8 Loan – Non-monetary Impacts: About 52 percent of the respondents reported that their availing education loan made them more responsible and independent. 4.12.9 Ongoing Recession and Impact on Education Loan: About 31 percent of the respondents feel that banks became very strict in processing the loan application in view of the ongoing recessionary trend in the employment market. On the other hand, the ongoing recession in the job market is a matter of concern for those who have already availed loan.

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4.12.10 Limiting Loans to those who secured admissions in merit seat: Currently, according to the SBLC guidelines, the loan is limited to merit seat admissions. This has generated a lot of heat as students studying in the self-financing courses and colleges are denied educational loans. In fact, political leaders from Kerala have accused SLBC of favouring merit admissions and job-guaranteed courses only. They have also pointed out that the Indian Banks’ Association (IBA) has taken this step citing the 5.5 percent default in repayment out of Rs. 500,000 million sanctioned educational loans for the four south Indian states. They have submitted a memorandum to the Finance Minister regarding this matter and demanded a speedy action (Mathrubhumi, 6 August 2012). 4.12.11 Lack of Sensitivity to the Needs of the Poor: Education loan scheme in India is insensitive to the needs of the poor and the weaker sections. Considerable number of cases of rejection of loan applications from the poor and the weaker sections by branch managers of commercial banks are reported from states covered under the survey.

4.13

Problems of Education Loan: Banks’ Perspectives

According to an officer of State Bank of Travancore (SBT), around 50–60 percent of education loan from SBT bank is availed for nursing courses, and most of the beneficiaries joined courses in Karnataka. Several of these nursing colleges are not equipped to produce well-trained nurses. The beneficiaries had to take loan of around Rs.400,000 to meet the cost of education in Karnataka, and later they find it very difficult to repay the EMI of Rs.14,000 as many of them could be earning less than Rs.5,000 per month. During 2004–05 new nursing schools were opened with a new license from the Karnataka government, and through the network of their agents attracted several students from Kerala. These students were facilitated by these agents in availing education loan of Rs. 400,000, the amount available without any collateral security.

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Box 4.1 Discrimination of Poor Students Guidelines are provided by banks, both private and public sector, to their bank branches for providing education loan to students of up to Rs.400,000 without collateral securities. Recently, the amount has been increased to Rs. 750,000. Banks, in fact, publicly state that they are adhering to the guidelines and disbursing loans to poor students without collateral securities. The reality is entirely different as these banks, to keep their non-performing assets at a low level, try to avoid poor students from the scheme in a big way. Moreover, banks try to reduce the loan amount to a very low figure for economically backward students when they sanction loan. Internally each bank has an understanding to take precaution to avoid bad loans. The guidelines are mere eye wash. Source: Interview with K.K. Patnaik, Bhubaneswar, former bureaucrat of Government of Orissa, presently Senior Fellow, Institute of Social Sciences, a research organization.

4.14

Case Studies

Some specific cases of beneficiaries of education loan were reported from various parts of India during the field survey. These cases were selected to highlight certain crucial issues related to the use, availability and impact of educational loan on various sections of students and families. Various categories of cases are discussed and each represents unique characteristics and issues as listed in Table 4.10. Table 4.10 Case Studies: Characteristics and Issues Case Study Case study 1 Case study 2 Case Study 3 Case Study4

Characteristics and Issues Experiences of a beneficiary of foreign education loan for MBA course in Europe Issues related to recognition of a professional institute Premature closure of loan in the second year of study Poor family’s difficulties in availing education loan

Source Field survey Field survey Field survey Field survey

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82 Case Study Case study 5 Case Study6

Case Study7 Case Study8

Case Study 9 Case Study 10 Case Study 11

Characteristics and Issues Education loan in the early 1990s with high interest regime Loan for MCA from Mumbai university: personal guarantee outside the family for a small trader Foreign loan: two sons in a family availed loan BPL family mortgage its sole 5 cents landed property for Rs.125,00 loan from a private bank Education loan application under processing Death of a nurse: low pay andhigh EMI Loan and job insecurity

Case Study 12

Denied educational loan: Kerala girl committed suicide

Case Study: 13

High Court of Kochi orders against the rejection of loan

Case Study 14

Denial of education loan because of low marks

4.14.1

Source Field survey Field survey

Field survey Field survey

Field survey Field Survey Source: Times of India, New Delhi Edition, 1 November 2008 Source: The Asian Age, New Delhi, 30 April2012 MalayalaManorama, New Delhi edition,11 August 2011 Times of India, New Delhi edition, 22 October 2012

Case study 1: Foreign Education Loan for MBA from Europe

Manoj Utup, an engineering and MBA degrees holder from Kerala is currently working with an infrastructure company in Delhi. He had availed education loan from State Bank of Travancore (SBT), Perumbavoor Branch, Trichur district of Kerala, in 2002 for undergoing the MBA course (2001–02) from University of Strathclyde in Scotland. The loan was taken in 2001 after his parents’ land was given as collateral security. SBT assessed Rs.1.5 million as the total cost of study and gave 85 percent of this cost as loan. The remaining cost was met from contribution by the parents/student. According to the guideline of the bank, 15 percent of the

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study is margin money to be provided by the student or parent. The repayment period of this loan is seven years with an EMI of Rs.25,600. As on 31 March 2009, Manoj Utup had completed the repayment of six years out of the total seven. It may be noted that before his MBA he had an engineering degree with six years of work experience. Moreover, his wife, a software engineer, has been working with TCS, a reputed IT company in India. With this reasonably good financial background he had made the repayment for six years without any default. He has expressed satisfaction about the loan scheme as “it is useful in meeting financial needs and providing tax benefits”. He is emphatic about the positive impact of higher education loan on the development of a sense of responsibility and self-pride in the mind of a student. However, he is critical of the high level of interest rate. According to him, in view of job insecurity many beneficiaries may not be able to repay the loan. An element of government support should be included in the higher education loan system to facilitate students to avail the loan in the insecure job market. Source: Field survey.

4.14.2

Case study 2: Recognition of a Professional Institute and Delay in Sanctioning Loan

Ms. Sudha Balachandran, daughter of Mr.K.Balachandran from Kerala, had availed education loan for her designing course from Shrishti School of Art Design and Technology, Bangalore, in 2008. Her mother is a teacher in a higher secondary school in Delhi. Initially they had applied for education loan to HDFC Bank and Indian Overseas Bank. As the Shrishti School was not included in the list of recognized institutions their applications were rejected by both the banks. Finally senior officials of Vijaya Bank were approached by the applicant. The student and parents had made strenuous efforts to convince the bank officials about the institution. Indeed, officials of Srishti provided details of their students who had availed education loan from other banks. Based on the precedent set by Andhra Bank, which had given a loan to another student from the same institute, Vijaya Bank sanctioned the loan. The loan was granted in the joint name of the student and her mother. A loan amounting to Rs.550,000 was sanctioned from Vijaya Bank, Delhi Cantonment branch. The interest rate is floating and linked to the Prime Lending Rate, and the current rate is 11 percent. According to her father, K. Balachandran, the

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Delhi Cantonment branch of Vijaya Bank had taken just one week for sanctioning the loan after the submission of the application form. Source: Field survey.

4.14.3

Case Study 3: Premature Closure of Loan during the Course of Study

Anish Antony, who is currently working as a mechanical engineer in Saudi Arabia, had availed an educational loan in 1999 from SBT, Koottickal branch in Idukki district of Kerala. The amount of loan for his study at an engineering college in Adoor, Kerala, was Rs.300,000. His father, now retired, was a school teacher, when the loan was availed. As collateral security was required at that time for any amount of education loan, a land of 2 acres was mortgaged. In addition, as insisted by the bank, a life insurance policy from Life Insurance Corporation was taken by the father to ensure the repayment of loan in case of death of the father. Interest rate was 8 percent and repayment was to be made in 60 installments. Initially, the bank had informed that repayment would be from one year after the completion of the four-year course of the study. However, when a new branch manager assumed charge after one year, the beneficiary was asked to pay the interest portion of the loan with immediate effect. According to the beneficiary, the conditions of education loan were not so favourable at that time and so the loan was prematurely closed in the second year itself. Antony’s father had mobilized the required fund for the repayment from the sale of a piece of land. During the field survey, his father remarked that some of his friends who availed the education loan facility recently have better experience as conditions were relaxed since 2004. Source: Field survey.

4.14.4

Case Study 4: Poor Family’s Difficulties in Availing Education Loan

Satyabhama Panda, a 52-year-old lady in Bhubaneswar working as a typist with a private firm and earning a monthly salary of Rs.1,500, applied for education loan for the study of her younger son who obtained admission to an engineering course (computer) at the Institute of Technology and Education in 2005. The Athagarh branch of UCO Bank had demanded collateral security for providing the loan and the family who do not own

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land or any other property was not capable of meeting the bank’s demand. The meritorious student got a loan to the amount of Rs.70,000 at an interest rate of 11 percent from UCO Bank, Bhubaneswar, after providing a personal guarantee from one of his relatives. In fact, the total cost of the four-year course was Rs. 180,000, and the annual cost of the study was Rs.45,000. At a later stage of the course, the student applied for an additional amount of loan (top-up loan) for purchasing a personal computer, but the application was rejected by the bank. However, with the help of some friends he managed to get hold of a computer. Overcoming all these difficulties, the student completed the course successfully and got a job at HCL Tech, an Indian IT company, in 2008. Source: Field survey.

4.14.5

Case study 5: Education Loan in the Early 1990s with High Interest Regime

P.C. Varughese, an Indian Air Force employee, had taken an education loan in 1991 for the education of his son, BinoVarughese. The loan was taken to finance an engineering degree course from a government engineering college in Thiruvananthapuram, Kerala. He had availed a loan of Rs.300,000 at an interest of 14 percent from SBT, Karukachal branch, Kottayam district, Kerala. After the completion of the course, Bino Varghese got a job in Dubai and later moved to Canada. Currently he has been working with a local government of Canada in Toronto. The repayment of loan was made through a premature closure when the father took voluntary retirement in 1994. According to the father, the loan was quite useful as he was not in a position to mobilize enough funds to finance his son’s study. Source: Field survey.

4.14.6

Case Study 6: Loan For MCA from Mumbai University: Personal Guarantee Outside the Family for a Small Trader

Dharmang Bhupendra Vora is a B.Sc. Computer Science graduate and currently pursuing Master of Computer Application from Vivekananda Institute of Technology, Mumbai University. His father is a small-scale

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businessman and he had to give collateral security in the form of personal guarantee of a family friend for availing the loan from the MumbaiGirgaum branch of South Indian Bank. The loan was sanctioned for the three-year MCA course and in the first year he availed a loan of Rs.43,385. The student is quite satisfied with the loan scheme and he is quite optimistic of getting a good job so that the repayment can be done regularly. According to the student, many of his friends are not aware of the advantage of education loan system and he suggested that the procedures and advantages of various education loan schemes should be popularized. Source: Field survey.

4.14.7

Case Study 7: Foreign Loan: Two Sons in a Family Availed Loan

Brayan Xavier Thomas and Milton Xavier Thomas, two brothers, had taken foreign education loan from the Vadodara (Baroda) branch of South Indian Bank. Their parents are originally from Kollam, Kerala, and are presently living in Gujarat. Brayan Xavier Thomas had taken loan for his M.S. course in the United States. After he landed job in Chicago in 2007, he made premature repayment to the bank. Later his younger brother, Milton Xaviour Thomas, had availed loan from the same branch for his M.S. course in North California in 2008. Out of the Rs.800,000 that was sanctioned at the rate of 13 percent interest, he had availed Rs.400,000 for the first year of study. Their parents’ house was given as the collateral security, in addition to the personal guarantees of one of the parents, for availing the loan. According to Mrs. Magi Thomas, mother of the two sons, the foreign education loan scheme of South Indian Bank is quite useful. Source: Field survey.

4.14.8

Case Study 8: BPL Family Mortgages Its Sole 5 Cents of Landed Property for Rs.125,000 Loan from a Private Bank

Soni N. Varghese, Neyyan House, Vadakkancherry, Trichur district in Kerala, availed a loan of Rs.125,000 for his B,Tech course (2005–08) at an

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engineering college under University of Calicut. His father is a daily wage labourer and in 2005 the family had to mortgage its sole 5 cents of landed property for a loan of Rs.125,000 from Catholic Syrian Bank, Vadakancherry branch, Trichur. After completing his B.Tech from Royal College of Engineering and Technology, Akkikkavu, Trichur, he had been hunting for job for a few months. When he found that getting a job was very difficult in the recessionary situation, he joined a course in wireless communication. Soni, a 23-year-old man, worries that the sole property of his family is with the bank as he has not been able to get a job to start the repayment of loan. Though, as per the education loan guidelines, collateral security is not required for loan up to Rs.400,000, some private banks are insisting on it. Source: Field survey.

4.14.9

Case Study 9: Education Loan Application under Processing

A girl student from Pitambar Nagar, Unnao, near Kanpur in UP, applied for loan of Rs.600,000 to Punjab National Bank, Unnao branch, after obtaining admission to a design course with the 2008 batch at the National Institute of Fashion Technology (NIFT), Patna, Bihar. The annual cost of the study is estimated at Rs. 160,000, out of which Rs.100,000 is tuition fee, Rs. 36,000 food expense and Rs.24,000 cost of accommodation. Her parents’ annual income is about Rs.130,000. The student reported that the bank had not yet sanctioned the loan even after two months, and the application was still under processing as on 30 January 2009. The student was not aware of the reasons for the delay in the sanctioning of the loan.1 Source: Field survey.

4.14.10 Case Study 10: Death of Nurse: Low Pay and High EMI Jeemol John from Thirumoolapuram, Thiruvalla, Kottayam district of Kerala, who was working with the Indian Spinal Injuries Centre, a private 1

Our field investigators had tried to collect the information from the officials of the bank. However, they were reluctant to share any information with the investigators.

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hospital in Delhi, as a staff nurse at a monthly salary of about Rs.5,000, died at a railway station in Kerala. She was on her way to her home town for better medical treatment for hepatitis. It is ironical that a nurse in Delhi had to go to her home town for medical treatment for a complicated disease December 2009. After a two-day-long train journey she fell down to her death at the railway station of her town itself. She had taken an education loan for her study and the EMI was about Rs.8,000. Malayali Nurses Welfare Association, Delhi, is planning to take legal action against the hospital for not providing adequate medical attention to their staff nurse, which in turn led to her death. According to Malayali Nurses Welfare Association, Delhi, “majority of nursing students after completing studies by availing education loan work at low salary and due to their loan liability, they are compelled to continue their job even when there are several forms of exploitation and harassment at many private hospitals in Delhi”. Source: Field survey.

4.14.11 Case Study11: Loan and Job Insecurity in Aviation sector Afreen Shaik, an 18-year-old lady, availed education loan for enrolling at the Frankfinn Institute of Airhostess Training after her higher secondary. After the completion of the course she got a job in the airline industry with a monthly salary of around Rs.10,000. She is the only breadwinner in her family of five and has to repay a loan of Rs.250,000. She was among the first batch of employees sacked by Jet Airways due to the global economic slowdown. Though Jet Airways reinstated them for the time being, her future is bleak in view of the job insecurity in the company and uncertainty in the aviation sector. She had started repaying the loan after getting the job in 2007. But now the repayment is almost impossible for her in the prevailing situation. As the aviation sector has been facing problems of employment and poor growth in view of the global meltdown there is a risk in taking education loan for studying courses related to this sector. Source: Times of India, New Delhi edition, 1 November 2008.

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4.14.12 Case Study12: Denial of Education Loan and Suicide of a Female Student in Kerala Shruti Srikanth, a nursing student from Kerala, poisoned herself after failing to secure an education loan. Shruthi was a bright student, doing her B.Sc. Nursing course at a college in Andhra Pradesh and had completed her first year with 80 percent marks. However, she was unable to resume her studies following the denial of education loan by a leading private sector bank. An endless wait for a bank loan for pursuing her dream profession proved a nightmare for Shruthi. Unable to continue her studies without a loan, she committed suicide on 17 April 2012. It is reported that Srikant, Shruti’s father, had complained to the Chief Minister and the Home Minister about the delay in sanctioning of a bank loan for his daughter. Following Shruthi’s death, local people vented their ire on the private sector bank that refused her the loan and demanded action against the concerned bank manager. Source: The Asian Age, New Delhi, 30 April 2012.

4.14.13 Case Study13: High Court of Kochi Orders against Rejection of Loan Application An application for loan by George Francis to the Palarivattom branch of State Bank of India (SBI) for Rs.2 million for studying a management course in Missouri University, the United States, was rejected by the bank. The reason for the rejection was the nature of land given as collateral security. According to the bank branch, citing an internal circular of SBI, agricultural land was not admissible as collateral security. According to the loan applicant, the internal circular of SBI is not in line with the master circular of SBI and IBA. The master circular does not say anything about the nature of land to be given as collateral security while it says that education loan above Rs. 750,000 can be sanctioned if parents guarantee the repayment of loan along with the collateral security. Upon the rejection of the application, Francis sought the intervention of the High Court of Kochi. Subsequently, the court ruled that the bank branch was wrongly interpreting the circulars and the applicant was eligible to the loan. As a result of judicial intervention George Francis availed the education loan. Source: Malayala Manorama, New Delhi edition,11 August 2011.

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4.14.14 Case Study14: High Court of Madras Orders against Denial of Education Loan The High Court of Madras ruled that banks cannot deny education loans to students on the ground that his or her academic record is poor. This ruling from the court came in a case filed by Anita, a nursing student from Vellore district of Tamil Nadu. Although she passed her plus-two examination in 2005, she was unable to continue her higher education because of family circumstances and poor health of her mother. She joined B.ScNursing at Noorie College of Nursing in Karnataka in 2011. Her application for an education loan for Rs.315,000 was rejected by Punjab National Bank for the reason that her academic performance at the school level was poor. The High Court of Madras pointed out that there is no such provision in the circular of the concerned bank – Punjab National Bank – that the loan can be sanctioned only if the academic performance of the student was very good at the school level. Source: Times of India, New Delhi edition, 22 October 2012.

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Box 4.2 Misuse of Education Loan During 2003–04, over 400 new licenses were given by Government of Karnataka for opening nursing schools in Karnataka. Unfortunately, these schools were opened without adequate infrastructure and other facilities. These newly opened nursing schools deputed their agents in Kerala for canvassing students. The agents attracted students from low income families by facilitating education loan. It was during this time that the guidelines for education loan were liberalized and up to Rs.400,000 was available to students without any form of collateral securities. Many of these agents had managed to attract several students, especially students from the central part of Kerala. Agents who were offered very attractive commission by the newly opened nursing schools in Karnataka worked closely with some of the banks in Kerala by offering incentives to bank officials. In almost all the cases, the amount of loan was around Rs.400,000. Out of this amount around 60 percent was given to the nursing schools and the remaining was appropriated by agents and other “persons involved”. It is reported that several students had taken loan from two banks in the same area. This was possible as the State Level Bankers’ Committee and the District Level Bankers’ Committee were not functional at that time. Some of the bank officials had gone out of the way to grant loans, and a manager of a public sector bank in Trichur district was suspended for colluding with agents of nursing schools for giving loan without giving adequate attention to the guidelines. The students who come out of these sub-standard nursing schools might get into serious difficulties in getting a good job and hence loan repayment will be a Herculean task. Even if they get a job, the salary may not be more than Rs.5,000 to Rs.6,000 against their EMI of Rs.10,000 toRs.12,000. Source: Interview with Vinoy Mathew, Mathrubhoomi, Kannoor.

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Box 4.3 Loan Amount Based on Fees in Government Institutions: Students’ Problems in Private Nursing Schools in Karnataka In the first week of June 2009, private nursing schools in Karnataka affiliated to Rajiv Gandhi University raised their fees. The revised annual fees are Rs.80,000 for M.Sc. Nursing, Rs. 75,000 for B.Sc. Nursing and Rs.30,000 for GNM Diploma Nursing. The fees in government nursing schools in the state remain much lower. Banks follow the guidelines of IBA and provide loan amounts as per the fees in government institutions. For instance, banks are ready to give only a maximum of Rs.150,000 for B.Sc Nursing against the requirement of Rs.300,000 in private institutions. This situation caused problems to students from low income groups in getting admission to private nursing schools in Karnataka. Source: Sivanandan C.K., MalayalaManorama, New Delhi edition, 14 June 2009.

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Box 4.4 Education Loan: Impact of Global Economic Crisis and Relief for Students In view of the current downturn in the jobs market, national banks have taken certain steps to provide relief to students who have availed education loan. Several banks announced various types of relief measures. For instance, State Bank of India (SBI), the bank which has a 24 percent share in the education loan pie, will on a case-to-case basis reschedule loans. A spokesperson for SBI explained, “After all, we don’t want a student to sell his father’s house because he cannot pay back an education loan.” Mr. Vikas Chhapekar, General Manager, Bank of Maharashtra, Mumbai Circle, says, “In case a student is unable to repay an education loan, we will definitely help him out, and either extend the date from which the student must start repaying the loan or increase the duration for over which the loan has to be repaid.” Mr. A.K. Aggarwal, a senior manager of Bank of Baroda, another public sector bank, says, “My heart goes out to students at a time like this. If approached by a student who cannot repay his loan, we will, after clearance from the top, help reschedule.” The reaction of the student community to the recent move by the private sector banks is quite positive. Sidharth Gupta, who graduated from IIM-Bangalore in 2009, says, “This is obviously reassuring. Banks already have a rather relaxed system of repaying an education loan. But for those who do not want to take on the burden of repaying their loans right away and feel that they will be in a better position to do so next year, it helps to know that banks may re-negotiate the terms of the loan.” A post-graduate student at the Mudra Institute of Communications, Ahmedabad, Mr. Varun Shourie, says he will be happy with any move on the part of banks to restructure loans. Source: Times of India, New Delhi, 21 March2009.

Meeting of Members of Parliament on Education Loan In view of recurring incidents of suicide and other tragedies due to the friction between bank managers and students on various issues related to sanctioning, disbursement and recovery of education loan in Kerala, Members of Parliament from Kerala met various stakeholders in a specially convened meeting to discuss the matter. Representatives from Reserve Bank of India, State Level Bankers Committee (SLBC), a minister of the Government of Kerala and state government officials

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participated in the meeting. The Members of Parliament had asked the banks to levy a uniform rate of interest – if possible, a subsidized rate of 4 percent by all the Indian banks in Kerala. SLBC members, based on the suggestion by the Members of Parliament, agreed to stop the prevailing practice of insisting that the nearest branch should sanction education loan.

Applicability of Indian Experience to Developing Countries The foregoing analysis of specific cases of individuals reveals that the education loan system in India is yet to evolve to function in a full-fledged manner, and various issues of operation and management of education loan remain unaddressed. The interest of students from poor and low income families in using education loan as a tool for financing higher education is not served due to the rigid approach of several branches of commercial banks and arbitrary decisions and wrong interpretations. On the other hand, commercial banks are under severe compulsion to meet the interests of their shareholders in generating profit and keeping nonperforming assets to a minimum. They have a greater concern for the misuse of education loan by some sections of society and the growing trend of default in repayment. These conflicts of interest call for suitable policy interventions by the government of the respective country. At present, Government of India does not play a proactive role in popularizing this tool of financing higher education and as a result several issues remain unaddressed. However, the recent trend of judicial interventions and knee-jerk reactions of Government of India and some state governments reflect the urgency of reforms and policy interventions to make education loan a viable tool for financing higher education. The Indian experience can be a lesson for various developing countries in using education loan similarly, as a viable tool for financing higher education, by addressing various socio-economic issues of operation and management of education loan.

CHAPTER FIVE EDUCATION LOAN FOR INCLUSIVE GROWTH IN INDIA AND OTHER DEVELOPING COUNTRIES: A WAY FORWARD 5.1

Education Loan – International Experience

Developing and underdeveloped nations have taken certain initiatives to make education loans an alternate source of financing higher education, as higher education cannot be entirely funded from government funds. There are wide variations among countries in respect of administration of education loan. These disparities are mainly in respect of targeting of the loan programme and loan recovery. The repayment of loan is the major problem that has affected the financial viability of most of the education loan programmes in most of the nations. The failure of many students to repay their debt continues to the concern of loan managers. Any approach towards preventing the evasion of repayment of loans and choosing an appropriate infrastructure to collect repayments may influence the model of education loan system. Four different models of education loan schemes can be drawn from different country experiences as listed below: x Education loan with government guarantee to commercial bank x Education loan with government direct lending x Education loan outsourced with core public management x Repayment of education loan is integrated with the taxation system. In fact these education loan models do not provide any perfect system. Indeed a perfect system of education loan has not yet been developed in any country. An optimum model of an education loan system fitting to a country needs to be formulated considering its socio-economic and educational conditions. Several researchers have questioned the feasibility of education in developing countries as most of these developing countries do not have a well-developed education credit market. Poor recovery of loan and weak linkage between education and employment in their labour markets are other areas of concern. However, developing countries have launched

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different models of education loan schemes though these are not large scale education loan programmes with huge initial funds .

5.2

Education Loan System in India – An Evolving Model for Developing Countries

As higher education has become very expensive in India it is important to enhance the use of education loan within an appropriate framework of inclusiveness, as a non-government source of finance. According to some scholars, education loan is insufficient to resolve the problem of financing higher education primarily due to market imperfections, discrimination of commercial banks and insecurity in the job market. Education loan can be availed only by a small section of society mainly due to the weaknesses of the credit market in India. These limitations of education loan are to be addressed by each developing country. In view of the ever increasing cost of higher education and the declining public funds available for higher education in countries like India, there is an urgent need for popularizing loan as a source of funding higher education. The Indian educational loan system has similarities with Model 1 mentioned in Chapter 2, which provides a guarantee of repayment of student loan to the commercial bank by the government. The Indian model of student loan is in an evolutionary stage. Currently there is no involvement of any type of private agencies in the operation and management of student loan in India. Government-owned/public sector banks and privately owned scheduled banks operate and manage it under the guidance of Government of India. Government of India issued certain guidelines enlisting broad objectives of education loan and procedures for sanction, disbursement and recovery. In India, government does not give any guarantee of repayment of student loan to the commercial bank.

5.2.1

Salient Features of Education Loan in India

Indian Banks’ Association (IBA) has given a model of education loan. Branch managers of government-owned banks and private banks under the category of Scheduled Banks grant education loans on the lines of the IBA Model. Education loans up to Rs. 750,000 can be granted by banks without any collateral security and third-party guarantee. Earlier, the limit was Rs. 400,000 instead of Rs. 750,000. Though the present scheme is not flexible to the needs of the weaker sections, Government of India has

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recently introduced an interest subsidy scheme for education loans. According to the scheme announced by the Ministry of Human Resource Development, Government of India, students whose parental income is up to Rs. 450,000 per annum are eligible for 100 percent interest subsidy on education loans availed from scheduled banks. Interest subsidy is available for loans disbursed on or after 1 April 2009. Students who had loans sanctioned prior to that date would also be eligible for interest subsidy on fresh disbursements made by banks on or after 1 April 2009. There is a move to make education loan a right of a student. It is interesting to note there is an increasing tendency of seeking judicial interventions by the applicants of education loan against rejection of applications by banks. Due to mounting pressures, the government is working out some modalities to announce a credit guarantee fund for education. The government is proposing to establish a Credit Guarantee Fund Trust to administer and operate the Credit Guarantee Fund Scheme for education loans granted by banks up to 750,000 without any collateral security and third-party guarantee. Education loan in India is provided mainly by commercial banks. To a limited extent, cooperative banks also provide education loan. Allocation of funds, administration of loan and maintenance of information system are the sole responsibility of commercial banks in India. All the banks follow their own procedures in sanction, disbursement and repayment of education loan in India. However, these procedures are in line with the guidelines issued by IBA. The Ministry of Finance, Government of India, had initiated a move to set up a model education loan scheme on the basis of observations by a Parliamentary panel. IBA had prepared a model education loan scheme in 2001.The role of both government and educational institutions in the operation of the education loan system is quite limited in the country. However, the central government has taken certain positive measures such as issuing policy directions and guidelines to popularize education loan in the country. Even some of the state governments too are taking some interest in popularizing education loan. In order to popularize the loan scheme, Government of India provides tax exemption for education loan. Since 2007–08, under Section 80E of the Income Tax Act, not only students who have taken higher education loan but also their parents are eligible for availing tax exemption for the interest component of the loan. There is no limit on the interest amount for tax exemption while the repayment has to be made from the taxable source of income.

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Disbursement of Education Loan in India

As on 31 March 2012, the total outstanding education loan disbursed by all government-owned and scheduled banks was Rs. 490,690million. About 54 percent of education loans were received by students of the four southern states of Tamil Nadu, Kerala, Andhra Pradesh and Karnataka. It is interesting to understand that the 4 states among 35 states and union territories account for 54 per cent of the total education loan disbursement in India. Tamil Nadu has the largest outstanding loan of Rs. 116,250 million, followed by Kerala with Rs. 61,800 million while Andhra Pradesh and Karnataka accounted for Rs. 52,150 million and Rs. 34,798 million respectively. Till 2009, Kerala was considered as the leading south Indian state in the disbursement of education loan.

5.4

Execution of Education Loan Schemes in India: Socio- Economic Issues

5.4.1

Lack of Uniformity in Implementing the Education Loan Scheme

Though banks follow the guidelines of the government of India and the IBA in general, there are variations between different banks in respect of procedures for providing loans. Variations are mainly at bank levels. Variations in regard to the approaches towards dealing with loan applications are visible even at branch levels. It is reported that some branches were restricting the loan amount taking into account the repayment capacity of the parents or employment potentials of the course/student and the remuneration from the prospective jobs after successfully completing the course.

5.4.2

Secured and Unsecured Loan

Banks are not enthusiastic in entertaining application for unsecured education loan. As banks are bound to provide loan up to a specific amount without any collateral security, bank officials scrutinize such loan applications strictly and make all efforts to reduce the amount of loan.

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5.4.3

Conflict between Financial Inclusion Aversion by Commercial Banks

and

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In the absence of government guarantee, commercial banks have serious concerns in ensuring recovery of unsecured education loan. Banks’ keenness in reducing non-performing assets (NPAs) is in conflict with the principle of financial inclusion. Commercial banks believe that exposure to education loan can create asset–liability mismatches. Commercial banks in India, in their attempt to reduce NPAs, tend to reduce the size of education loans, especially to poor and low income groups.

5.4.4

Education Loan: Middle Class Oriented Scheme

The ongoing education loan schemes are analysed with reference to their availability to the poor, SC/ST, rural people and other weaker sections. The present loan system mainly serves the requirements of the middle income group. Only to a limited extent the lower income groups are able to avail the benefits of the scheme. Indeed, people below poverty line are almost kept out of the purview of this scheme. The results of our sample survey show that over 61 percent of education loan beneficiaries are from urban areas, as against a rural share of around 39 percent only. Another interesting finding is the smaller share of lower income groups in availing the benefits of the scheme. Around 29 percent of the beneficiaries are in the category of having average monthly income of below Rs.10,000, and the remaining 71 percent have average monthly income of above Rs.10,000. Indeed, around 58 percent of beneficiaries are in the average monthly income range of Rs.10,000–30,000.

5.4.5

Criteria for Sanctioning Education Loan

According to 83 percent of the loan beneficiaries who participated in our field survey, education loan was sanctioned based on the current income of the applicant’s family without considering the expected earnings of the student. For about 7 percent of beneficiaries, it was sanctioned based on the expected earnings of the student.

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5.4.6

Chapter Five

Role of Government and Credit Needs of Students from Poor Families

The Indian education loan scheme is neither a government-sponsored nor a government-supported one. Hence, the credit needs of students from poor families are not met.

5.4.7

Education Loan- Risk factors as Perceived by the Lenders

Commercial banks in India face various kinds of operational problems in managing education loan, mainly related to identification and selection of students for disbursing loans. Rising arrears and continuous default in the repayment of loan are the other major areas of concern for them. About 77 percent of bank officials covered under the field survey have reported several cases of default in education loan in their respective branches. According to 95 percent of bank officials who responded to our questionnaire, banks should extend education loans, not simply based on fee structure, but considering income generation capacity and job potentials.

5.4.8

Misuse of Education Loan Scheme

Some cases of misuse of education loan scheme were reported during our field study. For instance, several students were admitted by newly set up private nursing schools using inflated fee structures in Karnataka during 2003–04. These nursing colleges in Karnataka had fixed Rs.400,000 as the fee for the B.Sc. Nursing course simply because of the availability of education loan up to that amount without collateral security. These institutions had even facilitated the students and parents in availing loan through their agents in Kerala. This misuse of education loan was happening mainly because of the unavailability of an approved fee structure for every course.

5.4.9

Repayment of Education Loan: Problems

At least a small section of beneficiaries deliberately avoid repayment, expecting a loan waiver scheme from the government for education loan,

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as in the case of agriculture loan. In our field study, about 12 percent of beneficiaries belonged to this category. Lack of adequate salary from the present employment is another reason, mentioned by 45 percent of the defaulters of the loan. While 15 percent of them have reported unemployment as the reason, about 28 per cent have not cited any reasons for the default in the repayment of education loan.

5.4.10

SLBC and Operational Problems in Managing Education Loan

State Level Bankers’ Committee (SLBC) of each state plays an important role in dealing with the many operational problems of education loan. The deliberations on education loan during SLBC meetings in Kerala were found to be serious and fruitful during the field study. Quite often the interests of commercial banks and government, two stakeholders in the education loan system, become conflicting. For example, in one of the meetings, representatives of State Bank of Travancore had argued for imposing some restrictions on providing education loan in the context of misuse by some nursing institutions, but the representative of Government of Kerala advocated for a cautious step on this issue.

5.5

Education Loan: A Way Forward for India

Considering various issues of financing of higher education in India, the way forward should be to enhance the use of loan as a significant source of financing. Certain concrete steps are required to promote the increasing use of education loan in India.

5.5.1

Criteria for Fixing the Amount of Loan

While extending loan to students without collateral securities, banks fix the loan amount not simply based on fee structure, but also considering income-generation capacity and job potential. This approach of the banks is intended to reduce their non-performing assets. Unfortunately, many meritorious students from poor families do not get adequate amount of loan to meet their genuine requirements. Government should give a guarantee of repayment to the bank to provide sufficient amount of loan to meritorious students from poor families.

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5.5.2

Interest Component of the Loan

The interest component of education loan of lower income groups should be fully subsidized. The concept of creamy layer, which is already made applicable to reservation in educational institutions, can be made applicable in disbursing education loans also. According to the scheme announced by the Ministry of Human Resource Development, Government of India, students whose parental income is up to Rs. 450,000 per annum are eligible for 100 percent interest subsidy on education loans availed from scheduled banks. Interest subsidy is available for loans disbursed on or after 1 April 2009. It is significant to note that the recent steps taken by Government of India to subsidize the interest component of education loan are not yet implemented effectively.

5.5.3

Repayment Capacity of the Student

Under the education loan scheme the repayment of the loan should depend upon the job potentials and income-generation capacity of the student instead of the income level of parents, especially when the family income is below a specific level. The repayment can start only after the income of the student reaches a predetermined amount and the government should pay if a student’s income never reaches that cut-off amount.

5.5.4

Change in Repayment Models

Banks can introduce adequate flexibility in the repayment of education loan. Instead of EMI, different models of repayment can be formulated. For example: Repayment between years

0–2 = 70 percent of EMI 3–4 = 110 percent of EMI 5–6 = Remaining amount

Flexibility in the repayment of education loan will definitely help students who face problems in an uncertain jobs market. It may be noted that in view of the current downturn in the jobs market, some of the national banks have already taken certain steps to provide relief to students who have availed education loans. These include rescheduling of education

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loan on a case-to-case basis. Such an approach should be a permanent feature of the education loan system in India.

5.5.5

Availability of Approved Fee Structure

In order to avoid misuse of the loan scheme for joining courses of private institutions, the approved fee structure should be made available to the banks. This system can prevent admission frauds such as the nursing admission racket of some private nursing schools in Karnataka in 2003– 04. It is desirable to form a committee of representatives of major banks and the department of education of state governments to work out a common fee structure for different courses.

5.5.6

The Emergence of New Institutions: Need for Precautions

Several new educational institutions in various fields are being set up in different parts of India. Some of them are quite professional, but many others may not meet the required standards. There is a need for a better system to be in place for giving adequate guidance to students and banks in availing loans for studying in these institutions.

5.5.7

Creation of an Independent Authority at the National Level

It is desirable to create an independent agency to oversee the education loan system in India. The agency can also oversee the students grant scheme or any student aid scheme. The independent authority can deal with various operational issues of education loan in the country. The agency can x issue rules for loan, x collect data on loan, x pay interest subsidy to banks, x monitor loan disbursement, x assess the recovery, default and impact on student’s academic performance and professional achievements, and x function as a link between various stakeholders.

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In order to create autonomy and competition in the education sector, the National Knowledge Commission has recommended an independent regulatory body for this sector like TRAI for telecom and SEBI for the financial sector. It may be noted that the CABE report had recommended the setting up of a Higher Education Finance Corporation to coordinate loan schemes being operated by commercial banks. It was envisaged that resources are pooled from corporate and government sectors for this purpose.

5.5.8

Financial Inclusion

It was remiss of us not to use education loan as an instrument for promoting higher education across all sections of the society and thereby encourage inclusive growth. There is a need for targeted fund allocation for education loans. As in the case of grants and scholarships, both central and state governments should allocate sufficient funds for education loan programmes. There should be a target of loan for poor students. Students from BPL families, SC/ST and low income groups should get special treatment. Education loan schemes need to be redesigned based on the principle of financial inclusion. Higher education is a key determinant in achieving an inclusive growth in India. There is good scope for popularizing education loan as a tool for financing higher education in India. Students from all segments of society can avail the scheme. Logically it makes sense for Government of India and also the state governments to take suitable steps to ensure that a deserving student from a low income family should get education loan on easy terms and conditions. Central and state governments should use education loan as a tool for promoting financial inclusion especially in the context of their commitment to provide education to students who belong to poor families.

5.5.9

Banks’ Strategy and Sectoral Approach

The commitment to financial inclusion should not lead to the accumulation of non-performing assets of commercial banks. With adequate regulation, education loan can be marketed as a good financial instrument. It is required to have a well-designed strategy through a joint risk-sharing guarantee structure with the participation of all stakeholders. While administering education schemes in a liberal approach, it should discourage deliberate default in repayment and misappropriation of funds by those with vested interest. There should be adequate transparency in

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providing loans with a proper follow-up scheme to ensure repayment in the case of gainful employment of borrowers. To prevent default in repayment after getting a job abroad, the involvement of Ministry of External Affairs of Government of India can be sought. With the help of this ministry, a suitable strategy can be devised to trace the defaulters easily.

5.5.10

Popularizing Education Loan: Need for Active Involvement of All Stakeholders

The role of universities and educational institutions is quite insignificant in the Indian education loan system. Education loan can be popularized with the involvement of universities, education institutions and alumni associations. There should be an enhanced and constructive role for universities and educational institutions and alumni associations in popularizing the loan in the country.

5.5.11

Education Loan as an Effective Source of Financing Higher Education

Education loan has a great potential in enhancing investment in higher education, and India needs to redesign its current education loan scheme to make it an effective source of financing higher education.

5.6

Relevance of the Indian Experience to Developing Countries

Education loan has a great potential in enhancing investment in higher education in developing countries. However, there should be a paradigm shift in policies and practices related to education loan and these countries need to redesign their current education loan system to make it an effective source of financing higher education. Developing countries should take a long-term view of policy choices providing special focus on students from poor and disadvantaged families. Accessibility of qualified students from poor and disadvantaged families to loan is to be ensured, preferably by providing interest subsidy by the respective government. The opportunity to join a higher education course should not be denied at any level to any deserving student for want of funds. An effective

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system of education loan can ensure access to quality higher education for all deserving students. Low interest or subsidized interest on education loan should become part of the social culture of these nations. Respective governments should play the critical role in providing subsidy to students from poor financial background. It is also essential to formulate a welldesigned strategy of a joint risk-sharing and guarantee structure where all stakeholders participate. A proactive banking system should be in place to enhance the demand for loan. Above all, universities, other education institutions and alumni associations should be assigned more roles in the education loan system in developing countries. Developing countries, through the well-designed scheme of education loan, can maximize access to higher education for a given level of public spending.

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