In times where the entire world is becoming a knowledge economy, nobody can deny the importance of education. It is believed that better education opens doors to good life. But as the cost of living is on a rise, the cost of education too is sky rocketing.

There was a time when a few thousand rupees were enough for one to complete one’s education until graduation. But times are changing now.

With private schools, colleges and international universities mushrooming, the competition has introduced many of us to quality education. So, one need not travel across the geographical boundaries to pursue quality education. But as you may know, the cost of education in such a case multiplies as well. Therefore those who cannot raise adequate funds from their own sources especially for higher studies, often take an education loan.

But it is noteworthy that of late, repayment and recovery of education loans has become a cause of serious concern. It is believed that due to slowed down economy and fewer job prospects, students have been defaulting on their loans. Banks have been facing a problem of rising Non-Performing Assets (NPAs), and are finding it difficult to recover dues. You see, The Hindu Business Line recently reported that, exposure of public sector banks to education loans may be around Rs 60,000 crore. Private sector banks are not much behind their public sector counterparts as far as their exposure to education loans is concerned. The rate of non-recovery has touched almost 9.5%, whereas the average rate of NPAs is about 4.5%.

In 2013 the then Finance Minister Mr. Chidambaram had directed public sector banks that well-deserving students should not be denied education loans. Following that, banks perceivably did not follow prudent risk management processes diligently to deny education loans. Later, it was discovered that the rate of default was the highest among those who have opted for loans worth less than Rs 4 lakh.

How are banks tackling the problem...
Some banks have tried to tackle the problem of non-repayment by offering jobs to qualified unemployed borrowers. Going one step ahead, banks are also willing to work with education providers to ensure that students get placement assistance from colleges. However there are many bankers who believe that the list of wilful defaulters in education of loans is also quite long. You see, sometimes it becomes difficult to distinguish between wilful defaulters and those who are find themselves incapacitated to pay.

Banks are now also demanding that, Central Government should increase financial support to Credit Guarantee Fund which would provide guarantee to loans falling in the range of Rs 4 lakh to Rs 7.5 lakh. The Government has proposed to establish a fund with initial corpus of Rs 2,500 crore. The proposed fund is expected to provide guarantee upto 75% of outstanding loan including interest on it. Also to crack the whip somewhere, especially on wilful education loan defaulters, banks are now thinking to report cases of non-repayment to Credit Information Bureau India (CIBIL), which in effect would punish the credit score of such loan defaulters. You see, until now banks were not reporting cases of non-repayment to CIBIL as instructed by the Central Government

PersonalFN believes it is true that, education is important in one’s life today and shouldn’t be denied just because of inadequate resources. So in this regard, the Central Government was right to ensure that more and more students get student loans. Having said this, banks should not have compromised on their risk management and due diligence processes which in effect may affect their asset quality and introduce a systemic risk. After all, higher NPAs pose a risk to the deposit holders who park their hard earned money in a bank, most of who are conservative investors. Banks have a tough job of balancing between both.

Some words of caution for students and parents...
PersonalFN is of the view that, although educational expenses are unavoidable, students and their parents should be wary of institutions and deemed universities providing educational courses and degrees at unnecessary and exorbitant costs. You shouldn’t fall prey to tall placement claims made by them. It is imperative to check the track-record of institutions and universities before taking admission. Since salary earned after placement is the primary source for student to repay the loan, they must carefully assess whether it would be viable for them to take loan and affordably service it. Although PersonalFN is not apprehensive about the idea of taking educational loan, it believes in planning for educational expenses well in advance. Financial planning services provided by PersonalFN help investors in planning for the future of their children.

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ssaigal1@gmail.com Jul 30, 2014 Hi, I borrowed education loan for my daughter for legal studies in the year 2007. As per norms I am repaying loan in easy EMIs. As per notification of pre-election budget before 16th Lok Sabha Election, by former Ho'ble Union Finance minister, Mr. P.C.Chitambran, that the interest will be waved off from education loan between period  01/04/2009 to 31.12.2013. Later RBI had also given favorable nod. My submission is my banker is insisting me to submit affidavit duly issued by first class magistrate mentioning that my family income is not more than INR4.5 Lacs per annum and only after that I shall get this benefit otherwise not. According to best of my knowledge my banker is confused with some other education loan which is only available for low poverty line people who has annual income of less than INR 4.5L /A and by producing such affidavit bank shall get subsidy from central government. In this regard I seek experts opinion how can I get benefit by waving off interest from 01/04/2009 to 31/12/2013. Best regards, Sunil

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