Debt trap

Education loans emerging as a new headache for banks as well as students?



Like other classmates, it was my aim to get admission in government medical college, Srinagar. There was no other medical college during our period. Frankly speaking, the aim to become a doctor was more parent-driven rather than my wish. But I couldn’t make it for not being academically so capable to score sufficient marks in the qualifying examination. However, one of my classmates, who too was of my level of academic capability succeeded to get admission in the medical college. On inquiry, I learnt that his parents had paid some 35 to 40 thousand rupees to some political acquaintance for the admission.
I missed the opportunity to secure a seat in the medical college as my parents had no adequate financial resources to pay this kind of money. Financial resource crunch often staved off the middle class students like me from higher/ professional education. Besides, at that time there was also no loan facility from the banks. Let me also tell you, it used to be a huge social stigma for being a loanee of a bank.
But times have changed now. Today, money is no problem. Students can pursue any expensive courses anywhere in the world. Banks are liberally giving loans to students, whether it is to pursue a degree abroad or from a premier institute in India. So far more than 24 lakh students have obtained loans from various banks in India.
By the end of this September, banks have education loans of Rs.53,500 crore outstanding. According to the RBI data, the banks had Rs 27,000 crore outstanding on education loans as of March 2009, Rs35,850 crore as of March 2010 and Rs 41,340 crore such loans as of March 2011 as per the data from the Reserve Bank.
According to Espirito Santo Securities, during the past five years, education loans multiplied by a astounding 10 times and have grown at a compounded rate of 35%. Since 2004 the proportion of education loans increased from 1.46% of priority sector credit to 3.59% of priority sector credit as of financial years 2012.
The concept of liberal financing through education loan scheme is aimed at nation building. However, the impact and performance of the scheme reveals some startling facts.
The very basic concept of shaping the young talent to contribute in nation building is being defeated. Education loans have emerged a new stress factor among students, particularly among those who have completed their studies and have been hunting for a job for quite some time now. Thus, impairing their ability to service loans taken to fund their college education. Notably, slowing growth has hurt the prospects of new entrants into the job market.
In normal times, a student with an elite medical, engineering or business degree would land a job easily with enough remuneration to start repaying the loan almost immediately. In today’s economic environment, there’s huge dearth of jobs. Even big corporate houses are very conservative in hiring people. So, this scenario had made it even more difficult for students to meet their loan repayment commitments. In succinct, they have turned defaulters.
It’s pertinent to mention that many business houses have frozen fresh hiring and have even been offering lower salaries. The easy access to education loans has also lead to emergence of a large number of sub-standard educational institutions run with poor infrastructure and under-qualified faculty. This fact has direct bearing on the job market as the message has spread far and wide about ‘average’ young talent passing out of these poor institutions.
Precisely, with the burden of loans on their shoulders, students could face severe psychological pressures, affecting their educational performance during studies and labour market performance after studies. This burden changes the attitude of students and of society as a whole with dangerous implications not only for the development of education, but also for the very social fabric and national development.
To conclude, for banks too, student loans are emerging as a new headache. These loans are going bad at an alarming rate. Some two years back, bad loans in education loan segment was just 2%. Today it’s 6%. It can go up to 10% if the current growth in disbursement of loans is taken into account. One thing is notable, government is contemplating academic excellence and nation building at the cost of asset quality of banks and pushing poor students in debt trap silently.
So, a huge question mark on this nation building initiative is visible. Are education loans breeding frustration and stress among lenders as well as borrowers? This question needs a serious attention and appropriate answer.

The views are of the author & not the institution he works for.  Feedback:

Lastupdate on : Mon, 17 Dec 2012 21:30:00 Makkah time
Lastupdate on : Mon, 17 Dec 2012 18:30:00 GMT
Lastupdate on : Tue, 18 Dec 2012 00:00:00 IST

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