EDUCATION LOAN - A PERSPECTIVE
A few years back there was a huge uproar in Kerala when a bank decided to sell the non performing education loan portfolios to a private asset management company. Neither the borrowers nor the public have any moral right to obstruct the sale as it was a commercial decision by the bank on the quantum of NPA to clean up the balance sheet. If the borrowers were frightened with that development, they should have paid back the loan. The media, politicians and the public all - voiced their concern in the bank's decision to sell the NPA portion of the educational loans to a private AMC. The genesis of the problem is something that require a deeper understanding. This write up is an attempt to look into various actions of the governments at various levels over the years which brought things to head.
The University education was mostly a state owned and state funded one with most of the universities set up by the state till about 1980s save for a few in every state. The government felt that it is becoming an increasing burden over the state to increase the number of universities under the state category and providing all infrastructure for the same. Come the 1990s, the administration decided to open up the education sector to all and with this aim, allowed many institutions to become a deemed universities Some of the private institutions in the technical and managerial education had opted for getting the deemed university status so that they could impart education of a different quality and standard. In this decade the IT industry came into its own and started recruiting people, in droves, with any engineering qualifications mostly directly from campus. This sudden gold rush into IT field had made the universities finding shortage of qualified persons to supply. Therefore, the states started permitting opening up of technical colleges in private sector. Thus the mushrooming of engineering colleges came on the scene and a few opted to become private deemed universities.
The mushrooming of such colleges created a huge demand on the existing pool of qualified and experienced teachers for various faculties. Some of the colleges in some remote areas opted to get the faculty on hourly basis and share them with nearby other private colleges. This created further problems. Most of these colleges were set up by politically influential persons. They found that for attracting the students to their colleges, they have to get qualified faculty which entailed payment of huge amounts as salaries and also provide various facilities in the college for the students to practice and work on. The infrastructure demands and the faculty demands put that much pressure on the institutions that the promoters of these colleges started charging heavily for the various streams of studies. Therefore, the fees charged by these colleges that were set up on self financing model became much beyond the reach of an average citizen.
The government stepped in with making the government owned banks to lend for education as in the case of developed economies. For providing a succour to the parents, the interest paid on such loans was made eligible for claiming tax exemption. This model of tax exemption and study loans were borrowed from the developed economies and introduced in the country by the then government to make the education in private colleges available to the common men and women. The study loan was made a part of the directed lending and came under the Priority Sector lending to enable the banks to meet their PSL targets. The broad guidelines did not exempt any branch of studies for eligible for loan.
In the above scenario, the banks started lending to this new activity which helped many banks to achieve their PSL targets as the industrialisation was taking a hit and the lending to MSME sector was slowing down with negative growth in many banks. In the next decade, the job market was saturated with more and more applicants as many colleges started turning out more number of graduates in many streams of engineering, management and also in nursing. Over a period of time, there was a glut in the job market with more than required candidates than the available vacancies in almost all sectors. There were not enough openings especially for those graduated in nursing, as the health care sector was just opening up and the corporate hospital culture though started much earlier in 1980s, started taking roots only in the second half of 1990s. . Many of them had to join the various hospitals and nursing homes with wages at a pittance that was barely sufficient for them to survive. Similar was the case of graduates with qualifications in engineering and management in other sectors of the economy as well.
In the above scenario, the study loan taken by these ex-students started growing into a big basket thanks to the compounding of interest. As the loans for amounts with a specific cap were lent only on personal guarantee of the parent and the student, the banks were left with no security when the loans came up for repayment. The repayments were not forthcoming though the students had been employed. The banks started extending the moratorium by an year in almost across the board. The government also came out with some extended moratorium for repayment of the educational loans taken after a particular date. This also did not help the Banks much as the loan basket was growing and the NPA in this segment was also growing with dwindling job market in the first half of the 2010s. Some of the banks in the midsize segment found that the non performing asset percentage in this particular segment growing at an alarming rate. This forced some of the banks to sell these non performing assets with or without any tangible security to the ARCs.
It is a vicious cycle that with the loan taken in a particular year for a education duration of 5 years and a moratorium of 1 year if repayment did not start even in the 9th year since the first disbursement of the loan turning into NPA and fresh loans had to be extended to other aspirants; knowing pretty well that if not all but a significant portion of such fresh loans in future may turn out to be dud loans. There were pressure from political parties and persons with political influence to extend the study loans to many aspirants, especially in states with higher literacy. The Banks were caught between the devil and the deep sea. In majority of the cases when the Banks called for recovery of the overdue amounts, either the student who was then employed was not available or the parents could not be contacted. In some cases, when the students got employment abroad, there was no intimation to the Banks leaving the Banks at wits ends. There were demands to write off the study loans as in the case of farmers' loans. The government came out with interest subsidy scheme for loans availed after a particular date to give some relief to the persons who had availed the study loans. All these measures did not help much in the ever ballooning NPA in this segment. The recovery became very difficult as there was no security to enforce. A court case filed for recovery, may take years to get a verdict. With these in minds, some of the banks started approaching the ARCs for sale of these non performing assets in this segment. Not many evinced interest but a few who did so, had to contend with opposition from the public and the politically influential people.
The successive governments save for in a few states had not bothered to regulate the fees charged by various private universities and institutions; the ever increasing fees charged by these private universities and institutions and the aspirations of many to get a technical qualification coupled with the shrinking job opportunity had been the bane of the study loan segment in the Banks. In the year since 2010 the technical graduates opting for an employment in Banks as regular officers had been on the rise, as this is the one sector where the vacancies are being caused by the huge retirements of the people who joined in the wake of nationalisation of banks in late 1960s.
The government stepped in with making the government owned banks to lend for education as in the case of developed economies. For providing a succour to the parents, the interest paid on such loans was made eligible for claiming tax exemption. This model of tax exemption and study loans were borrowed from the developed economies and introduced in the country by the then government to make the education in private colleges available to the common men and women. The study loan was made a part of the directed lending and came under the Priority Sector lending to enable the banks to meet their PSL targets. The broad guidelines did not exempt any branch of studies for eligible for loan.
In the above scenario, the banks started lending to this new activity which helped many banks to achieve their PSL targets as the industrialisation was taking a hit and the lending to MSME sector was slowing down with negative growth in many banks. In the next decade, the job market was saturated with more and more applicants as many colleges started turning out more number of graduates in many streams of engineering, management and also in nursing. Over a period of time, there was a glut in the job market with more than required candidates than the available vacancies in almost all sectors. There were not enough openings especially for those graduated in nursing, as the health care sector was just opening up and the corporate hospital culture though started much earlier in 1980s, started taking roots only in the second half of 1990s. . Many of them had to join the various hospitals and nursing homes with wages at a pittance that was barely sufficient for them to survive. Similar was the case of graduates with qualifications in engineering and management in other sectors of the economy as well.
In the above scenario, the study loan taken by these ex-students started growing into a big basket thanks to the compounding of interest. As the loans for amounts with a specific cap were lent only on personal guarantee of the parent and the student, the banks were left with no security when the loans came up for repayment. The repayments were not forthcoming though the students had been employed. The banks started extending the moratorium by an year in almost across the board. The government also came out with some extended moratorium for repayment of the educational loans taken after a particular date. This also did not help the Banks much as the loan basket was growing and the NPA in this segment was also growing with dwindling job market in the first half of the 2010s. Some of the banks in the midsize segment found that the non performing asset percentage in this particular segment growing at an alarming rate. This forced some of the banks to sell these non performing assets with or without any tangible security to the ARCs.
It is a vicious cycle that with the loan taken in a particular year for a education duration of 5 years and a moratorium of 1 year if repayment did not start even in the 9th year since the first disbursement of the loan turning into NPA and fresh loans had to be extended to other aspirants; knowing pretty well that if not all but a significant portion of such fresh loans in future may turn out to be dud loans. There were pressure from political parties and persons with political influence to extend the study loans to many aspirants, especially in states with higher literacy. The Banks were caught between the devil and the deep sea. In majority of the cases when the Banks called for recovery of the overdue amounts, either the student who was then employed was not available or the parents could not be contacted. In some cases, when the students got employment abroad, there was no intimation to the Banks leaving the Banks at wits ends. There were demands to write off the study loans as in the case of farmers' loans. The government came out with interest subsidy scheme for loans availed after a particular date to give some relief to the persons who had availed the study loans. All these measures did not help much in the ever ballooning NPA in this segment. The recovery became very difficult as there was no security to enforce. A court case filed for recovery, may take years to get a verdict. With these in minds, some of the banks started approaching the ARCs for sale of these non performing assets in this segment. Not many evinced interest but a few who did so, had to contend with opposition from the public and the politically influential people.
The successive governments save for in a few states had not bothered to regulate the fees charged by various private universities and institutions; the ever increasing fees charged by these private universities and institutions and the aspirations of many to get a technical qualification coupled with the shrinking job opportunity had been the bane of the study loan segment in the Banks. In the year since 2010 the technical graduates opting for an employment in Banks as regular officers had been on the rise, as this is the one sector where the vacancies are being caused by the huge retirements of the people who joined in the wake of nationalisation of banks in late 1960s.
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