Rising defaults in study loans

In the educational loan scheme, it is possible to borrow up to Rs 10 lakh for domestic education and Rs 20 lakhs for studies abroad. Borrowers need not pay during the tenure of the course plus one year after. The repayment period is five to seven years. In addition, for loans up to Rs 4 lakh, banks cannot ask for any collateral.  Government provides interest Subsidy for the period of moratorium on educational loans taken by students from economically weaker sections from schedule banks. All these concessions/relaxations have come into for the sole reason that no one shall be deprived of education for want of money to meet the study cost. The data furnished below will indicate that we were on the right direction to fulfill the objectives of the government.

PERFORMANCE OF EDUCATION LOANS AT PSU BANKS
As on	No of	Y-o-Y	Outstanding	Y-o-Y
31-Mar	accounts	growth (%)	Amount (' cr)	growth (%)
2005	4,68,207	46.62	6,713	47.54
2006	6,79,945	45.22	10,012	49.14
2007	9,44,397	38.89	14,283	42.65
2008	12,46,870	32.03	19,817	38.75
2009	16,03,385	28.59	27,646	39.51
2010	18,51,106	15.45	34,192	23.68
Source: IBA

However in the present context wherein social banking is taking a back seat and each banking unit is viewed as profit centre, performance of the asset and capability to give interest income shall be the prime criteria to continue lending under that particular segment. Increase in loan off take for a particular purpose shall not result in increase of NPAs. However the data indicates that bad loans granted for educational purpose do increase which is a real cause of concern for all. Non-performing assets (NPAs) reflect performance of banks. A high level of NPAs is indicative of a large number of loan defaults that affects the profitability and net worth of banks. Growth in NPAs necessitates larger provisions, thus reducing the overall profits and shareholders value. Rising NPAs is a big concern for the Indian banking sector.

BANKS WITH BIGGEST RISE IN GROSS NPAS
In Rs crore
Bank name	Gross non performing assets
Mar ‘10	Jun ‘10	Change
State Bank of India	19,534.89	20,825.22	1,290.33
IDBI Bank	2,129.38	2,640.15	510.77
Indian Bank	510.1	988.37	478.27
Punjab National Bank	3,214.41	3,613.76	399.35
ICICI Bank	9,480.65	9,829.03	348.38
Total (38 banks)	74,597.57	79,713.44	5,115.87
Compiled by BS Research Bureau                                              Source Capitaline

As a banker if I am asked to analyze the reason for the increase in NPA, I may come out with many number of reasons like- Relaxed lending standards on account of priorities of the Government, Aggressive selling of unsecured loans, Legal Issues, Market failure etc. I may come out with lot of suggestion in plucking the loopholes in the systems and procedures to extend educational loans. Banks may take stringent steps in closing the loopholes present in the system and also to keep a watch on the students.  

Bankers being accountable for the public money, field level functionaries shall have to necessarily adopt a system following rule book which will ultimately have a negative impact and slow down lending beating the objectives of the government.

Banks may also ask the government to create a credit guarantee fund for educational loans, in the lines of the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) jointly set up by the government and Small Industries Development Bank of India (Sidbi).

These may protect the bankers from the loss they may incur on account of default of the student and may reverse the slow down; but only for a short period.

Then what is the remedy? Only remedy is to increase the income level, creating the opportunity to earn either by self-employment of by creating more employment. Will this happen? If yes When?