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Thursday, September 3, 2009

Bankers wary of collateral-free education loan scheme

When a bank extends an education loan it takes a call on the course and the prospect of the student-borrower getting a job on completion of the course.—
Collateral-free education loans given by banks under the ‘model education loan scheme for students to pursue higher studies’ has bankers a bit worried.
Their concern stems from two counts. While on the one hand they do not have any tangible security to fall back on should an education loan of up to Rs 4 lakh turn sour, on the other, in the current scenario of a slowing economy whereby either jobs are hard to come by or even if a student lands one, he/she is not in a position to service the loan due to low pay. Hence, they are cautious of potential irregularities in the servicing of these loans.
Underscoring the bankers’ predicament vis-À-vis collateral-free education loans, a public sector bank official pointed to the case of a daily wage earner’s daughter who took an education loan for enrolling into a four-year B.Sc (Nursing) degree in a private college in Kerala at an exorbitant fee of around Rs 80,000 per annum.
On completion of the degree, the student-borrower got a job in a private hospital in Chennai at a monthly salary of Rs 2,000, which is barely enough to eke out a living, let alone pay the bank loan. Given their economic condition, the bank could not initiate recovery proceedings against the parents, who were the co-borrowers.
Under the model education loan scheme, which is in operation across all banks, according to a directive issued by the Reserve Bank of India in 2001, banks can neither charge margin nor take security when a student-borrower takes education loan of up to Rs 4 lakh. The bank, however, can rope in the parents of students as co-borrowers.
Privately-run professional colleges are making the most of the collateral-free education loan scheme. “Knowing very well that banks are giving collateral-free education loans to students, private colleges have hiked the fees of professional courses. These institutions are making profits at the students’ expense,” said a bank official.
High interest
As banks do not take any collateral for education loans up to Rs 4 lakh, they charge higher interest on such loans. For example, State Bank of India charges 11.50 per cent interest on education loans up to Rs 4 lakh.
For education loans above Rs 4 lakh and up to Rs 7.5 lakh and over Rs 7.5 lakh, the bank charges 11.25 per cent and 11 per cent interest respectively.
“When a bank extends an education loan it is taking a call on the course and the prospect of the student-borrower getting a job on completion of the course. In this regard, our comfort will increase if the model education loan scheme could be suitably modified, whereby banks are allowed to create a lien on security if the borrower is in a position to offer one. Then, we could consider bringing down interest rates on education loans up to Rs 4 lakh,” said a senior official with a public sector bank.
In the case of education loans above Rs 4 lakh, banks charge a margin of 5 per cent for studies in India and 15 per cent for studies overseas.
Collateral security
For education loans above Rs 4 lakh and up to Rs 7.5 lakh, besides roping in parents as co-borrowers, the banks also seek collateral security in the form of a third party guarantee. For loans over Rs 7.5 lakh, banks seek 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 instalments.
Outstanding loan portfolio
According to various estimates, the outstanding education loan portfolio of all banks put together is in the region of Rs 30,000 crore as on March 31, 2009.
“Due to the economic slowdown and the consequent slump in the job market, the bank has seen some cases of students not reporting to the bank at the end of the one-year moratorium period after the completion of their course, following which they are supposed to start repayment. We don’t think it will become a serious NPA situation. As of now it is just overdue,” said a senior Andhra Bank official.


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