Sunday, July 7, 2013

Bank Loans for Students – A Non-Starter

Please read my blog posting titled Fraud on banks by defaults on educational loans, published in April 2013:

A number of people have mentioned one peculiar feature of this posting. It bubbles with enthusiasm about the institution of a bank loan scheme for students, and about the Govt subsidy which ensures that socially disadvantaged students don’t have to pay interest on the loans. However, the title focuses on the possibility of defaults in repayment. Why was there this conflict of views? If you read that posting, you will notice I mention a meeting with a banking acquaintance who told me about the defaults that are said to be occurring in India. My choice of the title was influenced by his legitimate concerns. 

don't blame bankers for looking at the world with conservative eyes. They are responsible to make sure that money lent out comes back. That is why I discussed measures to reduce defaults in repaying student loans. In the absence of bold measures, the student’s bank loan scheme will not work. My recent experience with a bank branch will tell you something about this.

Soon after writing my April posting I encouraged a number of people I know to look for a bank loan to finance their children through college. I accompanied a father and his daughter to a bank branch to see for myself how the system works. The family is an SCST family and the girl has received excellent marks – well above the minimum specified. She has done two years of college and wanted to borrow money for the third year. The first shock was that the bank told her that she would be able to borrow only Rs 17,000 or so, covering her college fee and the cost of books. A cheque directly in the name of the college would be issued. The girl asked if she could borrow some money towards her living expenses. The answer was no. She buys a monthly bus pass to go to college. Can she borrow the cost of this? No. Can she get the benefit of the Govt subsidy scheme to get a waiver of interest repayment? There was no direct answer, but she was told that she would have to pay 12% interest. She would have to leave all originals of important certificates with the bank and reclaim them later on repayment.
Well, her parents had pledged jewels in the past to educate her this far. The father works as a manual labourer. It was very clear to the father that the Govt scheme as run by the bank was worse than what the pawn shop offers him!
As I look back at this experience, I understand why the scheme is a non-starter.  The risk is with the manager who authorises loans with no collaterals, so he is stingy. The less he lends the safer it is for him. The financial return to the bank is zilch and any time the manager puts into this does nothing for his branch. The Govt officers who planned this scheme have not thought out how to protect the banks against defaults, and how to incentivise them. The Govt that spends Crores of rupees on systems like the Aadhaar card has not bothered to think how to link an Aadhaar ID to a bank loan, so that the borrower cannot scoff at repayment. His/her future credit worthiness can be easily linked to repayment of this loan. 

But, why bother with all this? There are plenty of influential people who have all forms of collateral, though they pay no taxes. The banks can oblige them by lending lots of money with no risk. All Govt subsidies ear-marked for this scheme can be easily “utilized”, without wasting time on poor students. Why bother with those who can barely qualify for Rs 17,000 loans while there are others who can borrow Rs 10 lakhs to send their sons and daughters to earn MBAs?

Don't bother if credit-offtake is poor and money rots in banks! Ask critics to first worry about grain in the Govt godowns first!  

Srinivasan Ramani  

No comments: