Education loan defaults becoming a problem

The rising number of defaults among educational loans is a serious concern for banks, and keeping track of students after the completion of their course a huge challenge, said the chief executive of Indian Banks’ Association (IBA) in Bangalore.

The issue of loans turning bad is becoming a problem for banks of late, said Mr. K. Ramakrishnan, Chief Executive, IBA, at an interaction between Karnataka-based banks and heads of educational institutions in Bangalore, organised by Canara Bank.

The interaction was part of a series of interactive meetings proposed by the Ministry of Finance and IBA with various stake-holders in the education sector. He pointed out that as on March 31, 2011, the non-performing assets (NPAs) in the educational loan segment stood at Rs. 1,600 crore (Rs. 16 billion) from over 100,000 accounts.

Educational loans outstanding in public sector banks as on March 31, 2011, was Rs. 43,074 crore (Rs. 430.74 billion), from over 220,000 accounts. He also said that the Ministry of Finance is thinking of how best banks and educational institutions can work together to make educational loan schemes more meaningful with merit as an eligibility criteria.

Rating system
Mr. Ramakrishnan suggested that educational institutions be rated by banks, based on their placement record, which would also help banks decide on the sanction of loans to students joining such institutions. He also urged the colleges to spread awareness on the Central Sector Interest Subsidy scheme for inland studies for students from the economically weaker sections with parental income of up to Rs. 450,000 during the moratorium period. So far, Rs. 842 crore (Rs. 8.42 billion) of subsidy has been processed and over 900,000 students have benefited, he said.

High cost of education
Mr. S. Raman, Chairman and Managing Director, Canara Bank, said that there was a mismatch between the higher cost of education and the potential income levels of students after completion of education in some professional courses, which had to be addressed.

The government’s proposal for a credit guarantee scheme for educational loans would help make interest rates “finer”, he added. Mr. Raman admitted that his bank was witnessing signs of stress in the educational loan segment of late, which was not the case earlier.

Source: The Hindu Business Line, February 20, 2012