Tuesday, 1 November 2011

Education loans: Young defaulters

When Akshat got through one of the premier business schools in the country, he applied for an education loan. With the government defining education as priority sector, he had little difficulty in getting a loan. Later, Akshat got through one of the best MNCs in the country drawing Rs 14 lakh per annum. While one would expect him to repay his education loan with ease, Akshat conveniently forgot about it.
He is not a solitary case. There are many like him who, despite earning well, are lax about repaying their loans.The young Indians, it seems, are getting callous in repaying loans.
One of the prime factors for this, experts say, is most education loans — around 62% —are of under Rs 4 lakh. Since the amount involved is small, banks do not find it viable to persist with the recovery processes. Also, there is no collateral security involved for loans under this category.
According to the Indian Banks’ Association (IBA), the number of education loans has increased over seven-fold between 2003-04 and 2010-11. During the same period, the loan amount outstanding increased nine-fold.
On March 31, 2004 the number of such accounts was 3.18 lakh with outstanding amount of Rs 4,550 crore. At the end of the fiscal 2010-11, the number of loan accounts was 22.35 lakh with outstanding amount of Rs 43,074 crore.
Not surprisingly, the growth of annual educational loans inpublic sector banks has more than halved to 20.9% in fiscal 2010-11.
Top officials of banks attribute this to lack of awareness among youngsters of the ramifications of not repaying loans. This generation fails to understand that defaulting on loans affects credibility and narrows down options of getting another in future, said an expert.
“There are instances where despite getting a good job, there is an element of deliberate default, since students no longer want to repay their loans,” said Upendra Kamath, chairman & MD, Vijaya Bank.
The only way out is to have a stronger follow up mechanism in place. “Banks should have a way to follow up when students go overseas. Even for small amounts some collateral should be asked for as loan becomes a priority only when there is some kind of security involved,” said Robin Roy, expert with PricewaterhouseCoopers.
To address the issue it has been decided that loan to students will be approved only after assessing their earning capacity rather than their family wealth. Also, meritorious students will be given preference. “If the trend continues, banks will introduce more terms and conditions that will make education loan inaccessible to many,” said an education expert.

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