Education loans: Where Reading The Fine Print Matters
A gap between what is on offer, and the borrowers’ understanding of what they are in for when they go in for an educational loan seems to be the reason for a lot of payment defaults. When Shankar (name changed), a government doctor, sought a bank loan for his daughter in 2016, it was sanctioned without much ado. “I took a loan of ₹55 lakh for my daughter’s education in a deemed university medical college. I gave a property as collateral. At that time, loans were not sanctioned for deemed universities. But the manager wrote to his higher authorities and because I was holding a high position in the government, they sanctioned the loan,” he said.
He credited the ease of loan sanction to his position in the government. He had also planned the repayment schedule carefully. “The annual fee is ₹18 lakh. I paid for the first year but the rest of it was through bank loan. She is now in her pre-final year and next year I have to pay ₹9 lakh. I have started repayment right away, since the loan’s interest comes under IT deduction. I have been paying ₹50,000 every month towards interest from the first year. I will be retiring shortly and in case I am unable to pay for some reason, I can part with my retirement benefit to pay up the loan,” he said.
R. Kasinathan, a Tasmac employee from Tiruchi, faced no difficulty in getting a loan for his elder daughter. She will be graduating from a self-financing engineering college next year. “I took ₹2.5 lakh as loan. Each year, the bank pays ₹75,000 and I pay ₹25,000. Every three months, the bank reminds me to pay interest. I manage not to default,” he said. He has no idea about interest subsidy. “I approached 10 banks before the loan was sanctioned,” he added.
Ravi, a private schoolteacher from Kancheepuram whose daughter is hoping to get an MBBS seat in a self-financing college, has resigned himself to a long and arduous journey to various banks. “I approached one bank and they told me ‘select a college and come back’. If she gets a seat then I will have to start negotiating with the bank,” he said. Banks are currently willing to offer up to ₹60 lakh as loan with collateral for medical education. But the same cannot be said for other courses.
During the in-person counselling for engineering courses held in Anna University, a dedicated space was provided for banks to put up stalls. Though counselling is a month-long process, after the first week banks were seen packing up, an indication that only high-ranking students seeking admission to well-rated colleges benefit.
A senior official from a public sector bank said they look at the quality of the educational institution before disbursing loans. If engineering seats remain vacant in a college, banks become wary as they are doubtful about the job opportunities and repayment of loans, he pointed out. “The concept of educational loans was introduced in the country only two decades ago,” explained Educational Loans Task Force Convenor K. Srinivasan. Though quite a large number of students have since managed to get loans and have also repaid them, there is enough room for improvement, he said.
He blames the banks for not providing all the information about such loans. They neglect to inform the borrower about interest subsidies. Neither do they explain that borrowers can claim additional moratorium over the one-year-after-graduation period. The net result is that the bank declares the entire loan as a non-performing asset even though the borrower may have defaulted for only a few months, Mr. Srinivasan said.
The Indian Banks Association has a Model Education Loan Scheme under which loans up to ₹10 lakh are offered for higher education in India and ₹20 lakh for studies abroad. Collateral-free loans are provided up to ₹7.5 lakh under the Credit Guarantee Fund Scheme for education loans and there is no margin for loans up to ₹7.50 lakh. The repayment period of 15 years comes with a one-year moratorium for repayment after completion of studies in all cases.
“It also takes into account spells of unemployment/under-employment, say two or three times during the life cycle of the loan. Moratorium is granted for the incubation period if the student wants to take up a start-up venture after graduation,” Union Finance Minister Nirmala Sitharaman said in reply to a question in the Lok Sabha in June this year.
“You can invoke the clause but banks don’t tell the borrowers about these clauses and students end up as defaulters. Banks also fail to tell them that the cap for interest subsidy is ₹7.5 lakh and not for the entire loan. The students are under the impression that the entire loan will get subsidy,” Mr. Srinivasan said.
Banks are wary of defaulters who may render the loans non-performing assets. They don’t want political parties to make educational loans an election issue. A major factor contributing to non-repayment of loans is the election promise of an education loan waiver.
“Even those who were in the process of settling the loans have stopped repayment citing their anticipation of the outcome of the election promise. When their accounts remain dormant for three months at a stretch, the loans turn into NPAs, posing a headache for bankers. The question of leniency in dealing with these bad debts does not arise since the Reserve Bank of India norms for recovery are so strict,” a manager of a nationalised bank in Tiruchi that had advanced loans to several hundreds of engineering students pointed out.
“Despite bad debt accumulation, banks continue to meet the circle-wise targets set for granting education loans. Loans can be forwarded only to students pursuing courses in colleges approved by the Justice N.V. Balasubramanian Fee Fixation Committee,” S. Vaidyanathan, Lead Bank Manager, Indian Overseas Bank, Tiruchi district, said.
During the recent general elections, several political parties had promised educational loan waiver to gain votes. Mr. Srinivasan said he had urged political leaders to take up the issue of reducing interest on education loans.
Parents think otherwise. “The majority of engineering passouts are either unemployed or underemployed. Waiver of loans will benefit this large section of students. When farm loans can be waived based on certain parameters in the interest of society, why not education loans for those in a situation of financial distress,” wondered a parent whose son had completed B.Tech in Civil Engineering from a reputed college in Tiruchi and defaulted on repayment.
Bank officials blame the politicians who run most of the educational institutions. “The politicians force the government to prevail upon nationalised banks to lend large amounts as educational loans for survival of their educational institutions. The rather blatant assurances made by most of the managements of private colleges to students — to the effect that they do not have to repay educational loans — in their quest for boosting admission figures will only cripple the banking system. It is already struggling to maintain a healthy credit-deposit ratio due to industrial recession,” a senior manager in a rural branch of a nationalised bank said.
Bank officials pointed out that the terms of repayment are quite friendly. The problem of unemployment or under-employment can be resolved by restructuring loans and offering a one-time settlement option. Banks want an attitudinal change among borrowers. Some gainfully employed students in foreign countries tend to forget to repay educational loans. Bank managers say they are left with little choice but to go after the defaulters with the recovery mechanisms specified by RBI. The banks leave no stone unturned to recover these loans, branch managers add. A senior bank official said nearly 34% of the loans given to engineering students turn non-performing assets. Under-employment and unemployment and exorbitant fees play a part in this.
Parijat Garg, vice-president, CRIF High Mark, a credit bureau, concurs with the fears of banks. “The fees at premier educational institutions have gone up; as a result, ticket sizes are going up in recent years. Education loans of up to ₹4 lakh are showing higher levels of non-performing assets. The volumes are dropping in this segment as bankers are perhaps more reluctant to lend to the segment.”
Mr. Srinivasan faulted the banks for not disclosing all the details to the borrowers. Banks tend to fix a flat EMI for the loan. They do not inform the borrowers about telescoping the repayment. “If, after graduation, a student gets only ₹10,000 as income and if the EMI is high then it can be reduced commensurate with his current salary. And as his salary goes up he can slowly increase his EMI, so he doesn’t become a defaulter,” he said. Though the government launched a dedicated portal for educational loans— www.vidyalakshmi.co.in —it has not been popularised either by the government or the banks, Mr. Srinivasan charged.
But a senior official of a public sector bank said candidates fail to do their homework properly. They must visit the website, apprise themselves of all the schemes offered by the banks, draw up a checklist and submit the documents required, both online and as hard copies to their bank of choice. “Sometimes they use undue influence for loan sanction,” the official rued. There could be several reasons for defaulting on repayment, according to I. Jayanthi, secretary, District Legal Service Authority, Chennai.
During the special Lok Adalat held last year for 30 cases pertaining to educational loans, 21 were settled, with part of the amount being repaid on the spot, she said. A total of ₹12.91 lakh was settled on the spot and another ₹32.07 lakh was settled in phases. C. Mohandass, a fitter in a central government organisation, had taken a loan of ₹2.30 lakh for his daughter’s engineering education in 2012.
A year later she was diagnosed with renal failure and was on dialysis. “We neglected the child’s health and it led to serious ailment. We were told that only transplantation would help. But her heart gave way. We had placed a lot of faith in her but she died. I had paid 80% of the loan and then my daughter died in September 2015. The bank withheld my salary as I defaulted. I had already spent ₹15 lakh on her treatment. I was on the verge of taking my life. I went several times to the Lok Adalat and finally relief came. Ms. Jayanthi held a meeting with the bank and on humanitarian grounds the loan was waived,” Mr. Mohandass recalled. Ms. Jayanthi said in another instance she had settled an amount of ₹4.50 lakh for a medical student whose liability was ₹6.90 lakh. “The doctor was planning to go for higher studies and he had to take a loan for that too,” she said. In many instances, the DLSA got the interest waived and ensured that the borrowers paid the principal. When the banks pointed out their inability, “I contacted the higher authorities and arranged for a mutually agreeable settlement,” she said. Sometimes such moves invoke the displeasure of the banks but a decision has to be taken keeping the future of young people in mind, she added.
Source: The Hindu