Education loan defaults weigh heavy on banks- Business News

Education loans worry banks

In order to check the high default rate of education loans - currently eight times that of others - leading banks are mulling revisions to the current lending procedures.

  • October 6, 2010  
  • |  
  • UPDATED   08:57 IST

Political pressure is forcing the banking industry to continue with its education loan programme, despite the alarmingly high default rate - currently at eight times that of other loans. However, in order to minimise the quantum of defaults, these loans will now be restructured according to new norms that are being formulated and which will govern the manner in which these loans are given out.

The new norms, expected to come up in the next few months, may make it mandatory for students to have a PAN card to avail of loans to fund higher education programmes like MBA and other post-graduate courses. The move is aimed at tracking and making the educational institutions, as well the companies hiring such candidates, responsible for the loan defaults, to an extent.

The banks are now considering providing loans to only recognised institutions. For this it would take the help of the All India Council for Technical Education (AICTE).

Since many of these institutes are not recognised, students who graduate from them fail to secure employment and are therefore unable to repay the loans.

"Most of the education loan defaults are done intentionally, especially by students who pass out from premier educational institutions and then go abroad. There is no way we can catch these defaulters. The institutions as well as those companies which hire these students and post them abroad should also take the responsibility," said a top official of a public sector bank.

Banks provide easy student loans as part of their campus-lending programme. However, they argue that countries worldwide are recovering from the economic slowdown and they see no reasons for defaults.

Public sector banks and representatives of the Indian Banks Association ( IBA) had approached the finance ministry on August 14 for creation of a credit guarantee fund to support them to make up for losses on their education loan portfolio. But it was rejected citing lack of funds.

Another official of a leading public sector bank said it expects the government to take a positive view on the matter. "The ministry has asked us for detailed data of various banks to assess the quantum of defaults on education loans," the official added.

According to the data provided by the government, the outstanding education loans of 27 PSU banks at the end of the last financial year (2009-10) was Rs 34,192 crore across 18,51,106 accounts.

Of these, the outstanding loans of five top banks, namely State Bank of India was over Rs 8,907 crore, Punjab National Bank Rs 2,272 crore, Indian Bank Rs 2,308 crore, Andhra Bank Rs 1,647 crore and Bank of India Rs 1,719 crore.

According to a typical education-loan agreement, students availing education loans have to repay these loans within seven years of commencement of repayment, which starts a year after completion of the course or six months after getting a job.

Education loans of up to Rs 4 lakh are dispersed without any security or parents' co-obligation, while banks seek co-obligation of parents along with security in the form of a third party guarantee for loans of between Rs 4 lakh and Rs 7.5 lakh. However, for loans of over Rs 7.5 lakh, banks ask for co-obligation of parents besides collateral security of equal loan value.

Courtesy: Mail Today