Why education loan schemes are not ticking

The origin of the education loan scheme in India dates back to 1992. The scheme has evolved through contributions from the Finance Ministry, Indian Banks’ Association and banks.

What the Numbers Say?

Data on various facets of education loan (EL) are inadequate, unsystematic and discontinuous. We have compiled available data on EL from March-end 2005 to March-end 2012 from various issues of RBI Annual Report.

During this period, EL increased from Rs 5,700 crore to Rs 50,200 crore, yielding a CAGR (compounded annual growth rate) of 36.5 per cent compared to that for gross bank credit (GBC) at 22.7 per cent and priority sector credit (PSC) at 20.7 per cent. The performance of EL scheme looks impressive due to its low base. Against this, its year-on-year growth, which was 75.4 per cent in 2006, nosedived to 14.9 per cent in 2012.

Chart 1 presents EL-to-GBC and EL-to-PSC ratios.

Evidently, both the ratios remain at abysmally low levels. In addition, the ratios have plateaued in the last three years.

Chart presents the ratios of incremental EL to incremental GBC and to incremental PSC. It shows a mountain-and-valley panorama for both the ratios. However, the performance is not pretty, with drastic declines observed towards terminal years of the data series.

It can be seen that the EL scheme has not meaningfully taken off despite its two-decade-long existence and repeated moral suasion of bank chiefs by the Finance Ministers.

The EL scheme, as a business proposition, has not gone down well with bankers. The scheme is still being looked upon as a ‘scheme of near-donation’ by both bankers and borrowers. Therefore, bankers are not motivated to market the scheme proactively and aggressively. This is buttressed by the number of EL accounts which stood at just 2.28 million at end-March 2011.

Recovery

A search on the Internet revealed that no bank has put out recovery figures in respect of EL in public domain, which gives rise to suspicion that all is not well on the recovery front. Discussions with bankers at various levels confirm this belief. According to one estimate, EL NPA percentage was as high as 6 in 2011-12. According to yet another source, recovery percentage in Tamil Nadu as on June 30, 2011, was 5.02 for all banks and 1.25 for co-operative banks.

We see a vicious circle here. Since the EL scheme is not being marketed as a business proposition, enthusiasm among bankers to recover loans is low, and since recovery is low, risks are more and bankers shy away from marketing the scheme.

Borrowers are also equally responsible for this sorry state of affairs. They think that ELs are grants, not to be repaid.

A section of bankers expect that the proposed Credit Guarantee Fund Trust for EL will alleviate the current situation.

Yes, it would definitely buck up the current sluggish trend in EL disbursement, but it should also be aimed at creating a healthy credit culture in the domain of EL, involving both bankers and beneficiaries alike.

Even if all ELs go bad, banks stand to lose only a tiny fraction of their GBC.

However, ELs serve a ‘noble’ purpose, particularly in a country like India where higher education, technical education and skill levels remain at low ebb and yet benefits of demographic dividend have to be reaped fully.

Therefore, it is imperative that the scheme continues but in a different garb.

Change the Game

The fact is both banks and borrowers see ELs as ‘doles’. So why not make ELs as ‘doles’ and bring them under the fold of Corporate Social Responsibility (CSR) of banks?

Every bank could earmark a certain percentage of their yearly net profit for distributing to meritorious students as scholarships through a carefully chosen set of educational institutions. The modus operandi can be worked out.

During 2010-11, ELs constituted 9.7 per cent of net profit of scheduled commercial banks, which is not a big sum. This will help banks boost their image in terms of CSR, which is of immense importance in today’s corporate world (even the Prime Minister mentioned about it recently in one of his speeches), particularly for financial institutions traditionally known as “agents” of socio-economic change.

Also, it will help save on both administrative and recovery costs involved in ELs.

To let EL continue as a loan scheme will be equivalent to allowing it to wither away like the Differential Interest Rate scheme of the yore.

If banks are aiming at serving a ‘noble’ cause, the CSR, rather than loan, route may be explored for EL.

This will be less harmful and embarrassing than a possible ‘waiver’ of the loans at a later stage.

(The author is a former commercial bank economist.)