After years of deliberations and representations from the banking industry, the government has frozen the contours of a sovereign credit guarantee fund for education loans. The fund will enable students to borrow up to Rs.7.5 lakh without any collateral or third-party guarantee. At present, banks release loans worth more than Rs.4 lakh only after receiving a third-party guarantee of up to Rs.7.5 lakh.
The move gains significance in the light of rising defaults in the space, which has provoked statements of concern from several corners, including Reserve Bank of India Governor Raghuram Rajan, who raised the issue at the sixth Delhi Economics Conclave in November.
A slowdown in the job market and high interest rates have been blamed for the bad loans situation. Things have been aggravated further by the relationship student-borrowers have conventionally had with banks. Lenders have sometimes been too suspicious of students to reschedule EMI payments, even at times where there was a genuine case for doing so, says K. Srinivasan, convenor of Education Loan Task Force, a voluntary body involved in spreading public awareness. Indeed, student-borrowers suffer in the absence of options like an automatic moratorium for borrowers going through a phase of unemployment. Students are ill-informed about the processes involved in the disbursement of loans and bankers do little to educate them. “In many cases, we found managers themselves do not have good knowledge,” says Srinivasan.
While these are systemic issues, a sovereign guarantee for education loans will offer some cushion to the borrowers. It is also soundly designed, industry players say. “On one hand, it makes lenders accountable to recover the loan. On the other hand, it has the linkages of students to Aadhar card to ensure appropriate tracking and recovery of education loans,” said Ajay Bohora, cofounder and chief executive officer of Credila Financial Services, a dedicated education loan company and an arm of HDFC. “There is also a 0.5 per cent annual guarantee fee to be paid for this guarantee, which ensures ongoing funds for the financial viability of this programme.”
Since this guarantee covers loan value of up to only 75 per cent of the total loan amount, says Bohora, this results in the banks taking due care of the credit profile while underwriting the education loan. “Also, on default of the loan, the final 25 per cent is payable by sovereign guarantee fund to the bank only after the due legal proceedings for the recovery. This ensures discipline in the entire ecosystem,” he says.
Discipline will especially be required of borrowers. As a credit bureau keeps track of their repayment behaviour, they will have to ensure they do not begin their careers with an unflattering credit score. This might help attack what Srinivasan calls the “casual attitude” of students. “They do not take efforts to understand the rules of the loan scheme,” he says. “If they have problems they do not meet the officials personally and sort out the problems; they send text messages or emails. They never care for the notices issued by the banks. When the banks take the loans to the courts, they raise a cry that the banks are harassing them.”
Yet, there is room for mismanagement. “In some developed economies, sovereign credit guarantee of student loans resulted in the education loan becoming the second largest asset class after mortgages,” says Bohora. “With the easily available funds in large amounts to students and almost open-door eligibility criteria for almost any and every institute, students started graduating with varied specialisations coupled with huge student loan debts on their heads. This resulted in high delinquencies and defaults in the student loan segment.”
India does not yet have a homegrown working model to compare the scheme with, even though the Delhi government announced a credit guarantee scheme for higher education in June. For the scheme to work, the government will have to ensure that the eligibility criteria of educational institutes is defined appropriately and monitored periodically. It will also be important to put in place a proper regulatory framework and relevant legal infrastructure. On the whole, though, it may prove to be a win-win for the economy and for students, improving enrolment across educational institutions that are now saddled with vacancies.