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Fostering Human Capital for a $20 Trillion India:What Can and Should Banks Do?
M R Das1
Contextualization
The art of economy building is changing. Finance is no longer the ‘engine’ of
growth; instead high-end human capital has emerged as the driver of ‘finance’
by facilitating its optimal use. In a knowledge-intensive milieu, countries with
comfortable capital cannot make desired macro- or micro-economic headway
unless complemented with appropriate human talent and skill (e.g., Middle
East). In advanced economies, the economic growth frontier has been shaped
equally by both physical and human capital.
Fundamentally, building high-end human capital necessitates a robust system
for higher education and skill development without which the likely benefits of
‘demographic dividend’ will be elusive. Therefore, we perceive that in order to
build a $20 trillion economy – sustainably and equitably - what India needs the
most is enrichment of its human capital, which is still grossly inadequate.
In this paper, we envision how banks, traditionally hailed as “agents of
change”, can be inspired to become a pivot for building and enriching high-
end human capital to sustain a $20 trillion economy.
Against the above-mentioned backdrop, the paper is structured as follows:
Section I addresses the fundamental issue of why should banks be drawn into
the education sector when the State is mandated to develop it? Section 2
dwells upon the role of banks in providing higher education loans; Section 3
focuses on cross-country experiences to draw lessons for India; Section 4
enunciates some practical policies to augment banks’ role in fortifying skill and
talent; and Section 5 concludes.
Besides own experience in two big banks as Senior Economist for over 3
decades, the paper basically builds on secondary data from publicly available
authentic sources.
1 Independent Researcher. Earlier, Senior Economist for 31 years in SBI and PNB.
2
Section I. Why Banks: A Supply-Demand Analysis
Higher education in this paper is meant to encompass education from college
level and beyond including general, professional and technical education.
Higher education effects metabolic transformation, in a positive way, in one’s
perceptions about changes occurring around her/him. S/he starts viewing
things analytically, weighing both ‘pros’ and ‘cons’. Further, it imparts skill,
which coupled with analytical capability, makes her/him more employable in
all-inclusive way not only for her/his own benefit but also the society’s benefit.
Higher education is the joint responsibility of both the Centre and States.
According to the Ministry of Human Resource Development, the number of
universities, institutions of national importance and the like increased from 20
in 1950 to 712 in 2014, with the State government universities dominating.
The number of colleges increased from 500 to 36,671 over the same period.
We evaluate the current status of our higher education from 4 angles: (a)
Demand, (b) Availability and regional balance, (c) Quality and (d) Cost.
Demand
Demand for higher education is increasing phenomenally. Besides, there is
noticeable structural change in demand. A variety of factors including
demographic, economic, technological, social and psychological has
contributed to this.
Increased per capita income, coupled with smaller family size, has enabled
parents to afford better and higher education for their children.
Today, employers prefer potential employees with many more qualifications or
specialized skills like MBA, specialization in financial management, computer
literacy, etc. Therefore, the students have to go for these higher courses.
Today, the public sector jobs are limited. The private sector, comprising
several MNCs, looks for varied qualifications, skills and talent in a person.
Hence, one has to invest in enhancing capabilities in order to begin a good
professional career. Further, career conscious employees have to pursue
advanced courses while working.
3
The youth psychology has transformed. They want to earn as much as
possible within the shortest possible time to attain a good standard of living
and recognition in the society because job span in the private sector is
uncertain.
There have been structural changes in the Indian economy with the service
sector coming to the forefront, aided by technology. Many new lines of
activities like media, IT, banking and finance, and real estate have emerged
which require skill and analytical expertise and the employers prefer those
with prior exposure.
Another noteworthy trend is that increasing number of students want to go
abroad for higher studies because they do not find education qualitatively
good here. Besides, as per a recent British Council study2, in India, a foreign
degree enhances one’s employability. In 2012, there were 1,89,472 Indians
studying abroad for higher education constituting 5.5% of the world total, with
outbound mobility ratio at 0.7 (UNESCO Institute for Statistics) and registering
a CAGR of 10% during 1999-2012. (Chart 1 illustrates the trend). Further,
2002 onwards, India steadily occupies the second position next to China.
1999
00 01 02 03 04 05 06 07 08 09 10 11 12 -
50,000
100,000
150,000
200,000
250,000
0%1%2%3%4%5%6%7%8%
Chart 1: Indian Students Abroad
Number (Primary Axis)Ratio to World (Secondary Axis)
Source: http://www.uis.unesco.org/
Availability and Disparity
As at end-March 2013, on an average, 1 university served 2,11,210 in the
age-group of 18-23 with wide regional variations (Range: 5,30,877 - 13,362 ).
Nearly three-fourth of the universities were in 13/30 States - 11 belonging to 3
2 The India Employability Survey, 2014.
4
regions, namely, North, South and West. A similar pattern is obtained for
colleges.
The Central, Eastern and North-Eastern regions are much deprived.
Therefore, students from these regions migrate to universities/colleges
outside their home States adding to their cost of education, besides
precipitating ‘brain drain’ from these areas.
As Economic Survey (2014-15) candidly observes “…institutions of higher
education are notoriously inadequate” (Volume I, pp.5).
Quality
Domestic ranking of universities and colleges by National Assessment and
Accreditation Council reveals that out of 179/630 universities accredited, 70
belong to ‘A’ Grade, 103 to ‘B’ and 6 to ‘C’. The corresponding grades for
5,224/33,000 colleges accredited are 554 - ‘A’, 3,697 - ‘B’ and 973 - ‘C’.
Insofar as global ranking is concerned, the scores of Indian universities are
pathetic. According to Times Higher Education magazine’s World University
Rankings 2014-15, India has only 4 universities/institutes in top 400, whereas
China has 11. In its BRICS & Emerging Economies Rankings 2015 Top 100,
India has 11 universities as against China (27) and Taiwan (19). In its Asia
University Rankings 2014 Top 100, as against 20, 18 and 14 universities from
Japan, China and Republic of Korea respectively, only 10 universities from
India find mention. A UNESCO report covering 11 Asian countries paints a
similar picture.3
As percentage of GDP, India’s R&D expenditure at 0.81 (2011) is woefully low
compared to many Emerging Market and Developing Countries (EMDCs),
e.g., Brazil (1.21), China (1.84), Hungary (1.22), Israel (3.97), Republic of
Korea (4.04), Russian Federation (1.09) and Turkey (0.86).
3 Higher Education in Asia: Expanding Out, Expanding Up (2014).
5
Affordability
Government Expenditure
Higher the government expenditure (Centre + States) on education, lower
should be the burden on students. In India, the government expenditure on
the entire education sector remains low. Between 2003-04 and 2012-13, total
expenditure on education by Education & Other Departments (Centre +
States) as proportion of GDP hovered around 3.3-4.3%, with most of the
times remaining below 4%. And, on higher education it was further low in the
range of 0.67 to 0.89% between 2005-06 and 2012-13. Charts 2 and 3
illustrate these trends.
03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 RE
12-13 BE
- 500
1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500
0.00.51.01.52.02.53.03.54.04.55.0
Chart 2: Total Government Expenditure on Education
Expenditure (Rs. bn) (Primary Axis)% to GDP (Secondary Axis)
Source: http://mhrd.gov.in/higher_education
05-06 06-07 07-08 08-09 10-11 11-12 RE 12-13 BE0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
900.0
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Chart 3: Total Government Expenditure on Higher Education
Expenditure (Rs. bn) (Primary Axis) % to GDP (Secondary Axis)
Source: ibid.
6
We also compared India with a select 15 of EMDCs in respect of 4
parameters and the results are summarized in Table 1.
Table 1: Government Expenditure on Education:International Comparison
Parameters Position from Top Value
1. Government Expenditure as % of GDP 10 3.8
2. Government Expenditure as % of Total Expenditure
9 12.9
3. Expenditure on Tertiary Education as % of Government Expenditure on Education
2 33.2
4. Per Tertiary Student (Constant USD) 14 828.3Source: http://www.uis.unesco.org/
Except in respect of the No.3 parameter, in all others, India’s rank was far
from satisfactory.
The role of the private sector in the form of own set-ups and/or collaborations
with the governments is minimal. In addition, private institutions charge
exorbitant rates and on various inexplicable heads. Incidence of fraudulent
institutions in the private sector is not uncommon and teaching standards are
many a time below par.
Inflation
Even when judged against the limited way ‘Education’ is factored in into
Consumer Price Index and/or Consumer Price Index for Industrial Workers,
Education inflation has several times surpassed General inflation. Moreover,
Education inflation is more downwardly sticky than General inflation. Thirdly,
Education inflation pervades even the lower tier places, besides metros.
Section 2: Education Loans by Commercial Banks – An In-depth Analysis
The origin of Education Loan (hereafter EL) scheme in India by banks can be
traced back to the pre-Nationalization period. Education as a significant
contributor to nation building was weaved into the measures for social control
over banks, which were initiated by the Government of India in 1967-68 and
became formally effective in February 1969. As at June-end 1969, there were
1,477 EL accounts with Rs.4.6 million outstanding.
7
The scheme thenceforth has evolved through contributions from the Ministries
of Human Resource Development and Finance, RBI, Indian Banks’
Association (IBA) and banks. IBA’s original Model Educational Loan Scheme
of 2001 has been revised over time and the latest improvements date back to
September 2012.
Brief Literature Review
As far as research-oriented studies on EL by banks is concerned, it is virtually
a virgin area. Most of the studies relate to government loans. Some of these
studies did not even favour commercial bank loans for higher education on
many grounds.4 It could be because commercial banks entered into the field
of financing education, in an effective way, rather late and the penetration has
not hitherto been adequately wide and deep. There are a few area-specific
sample studies which look into the socio-economic facets of the student-
borrowers,5 rather than how banks can use the EL route to help build high-end
human resources. Further, no study is yet available, in the public domain, on
the Non-performing Assets (NPA) issue in EL. This study is an attempt to
bridge these gaps.
EL provides financial support to meritorious students who want to pursue
higher education in India and abroad. Besides the basic Scheme, EL is also
4 Narayana, M.R. (2005): Student Loans by Commercial Banks-A Way to Reduce State Government Financial support to Higher Education, Journal of Developing Areas, 38(2), Spring.Robbins Committee (1963): Report of the Committee on Higher Education, London: HMSOTilak, J.B.G (1992): Student Loans in Financing Higher Education in India, Higher Education, 23(4) (June).----- (1999): Student Loans as the Answer to lack of Resources for Higher Education, Economic and Political Weekly, 34(1-2) (January 2-15):19.----- (2003): Higher Education and Development in Asia, Journal of Educational Planning and Administration, 17(2) (April).----- (2007): Student loans and Financing of Higher Education in India, Journal of Educational Planning and Administration, 21(3) (July).
5 Debi, Sailabala (2014): Loan Financing to Higher Education - Experiences of Bank Financing in a Less Developed Region, Journal of Educational Planning and Administration, Volume XXVIII, No. 1, January 2014.Panigrahi, Junisha (2010): Determinants of Educational Loan by Commercial Banks in India: Evidence and Implications based on a Sample Survey, Journal of Educational Planning and Administration, 24(4), (October).
8
available for niche segments such as vocational, skill development, training,
etc., courses.
Analysis
The analysis has been carried out at 2 levels: (a) for all EL and (b) for those
EL included in Priority Sector Loans (PSL).
All EL
Data in respect of all EL, available for the period March-end 2005 to February-
end 2015, were sourced from RBI Data Warehouse. Table 2 presents the
amount outstanding in respect of EL, Non-food Loans (NFL) and Personal
Loan (PL), of which EL is a constituent.
Table 2: EL, NFL and PL – Amount Outstanding and CAGRs(Rs. billion)
March-end EL NFL PL2005 57 10,048 2,563 2006 100 14,048 3,602 2007 152 18,012 4,528 2008 205 22,048 5,218 2009 286 26,018 5,625 2010 369 30,400 5,856 2011 430 36,871 6,997 2012 499 42,897 7,828 2013 550 48,696 8,988 2014 600 55,660 10,386 CAGR 29.9% 20.9% 16.8%
Source: http://dbie.rbi.org.in/
All the three types of loans grew at rapid rates. EL registered the highest
CAGR. As at end-February 2015 (latest data available), EL stood at Rs.635
billion, up by 5.5% over the level at end-February 2014.
Chart 4 illustrates the movement of EL as proportion of NFL and PL over time.
9
0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3 1 4 1 5 *
0.6% 0.7% 0.8% 0.9% 1.1% 1.2% 1.2% 1.2% 1.1% 1.1% 1.1%
2.2%2.8%
3.4%3.9%
5.1%
6.3% 6.1% 6.4% 6.1%5.8%
5.4%
C ha r t 4 : Educ a t ion Loa n a s pr opr t ion of N on- food a nd Pe r s ona l Loa n
EL/NFL EL/PL
*Up to February. Source: ibid.
EL/PL ratio rose almost steadily from 2.2% in 2005 to a peak of 6.4% in 2012,
i.e., it multiplied almost 3 times, but it fell by 3 percentage points each in the
next 2 years. In 2014-15 (up to February), the fall accelerated.
EL/NFL ratio rose rather tardily, doubling in 2010 over that in 2005 and
staying at that level for next 2 years. Thereafter it declined to 1.1% and
remained at that level up to February 2015.
Chart 5 presents the incremental ratios over time.
06 07 08 09 10 11 12 13 141.1% 1.3% 1.3% 2.0% 1.9% 1.0% 1.1% 0.9% 0.7%4.1% 5.7%
7.7%
19.8%
35.8%
5.4%8.3%
4.3% 3.6%
Chart 5: Incremental Ratios
EL/NFL EL/PL
Source: ibid. Computation ours.
The ratio of year-on-year increase in EL to that in PL rose at a fast rate initially
and reached a peak of almost 36% in 2010, reflecting initial ‘irrational
10
exuberance’, but thereafter it crashed. Similarly, the ratio of yearly incremental
EL to NFL increased initially, though not as rapidly as the corresponding
EL/PL ratio, but remained subdued and fell below 1% 2013 onwards.
In a word, EL/NFL and EL/PL ratios have been, by and large, on a downhill
since 2011. The major reason is banks’ reluctance to lend for Education,
since repayment faltered.
At March-end 2013, EL penetration and density ratios6 were estimated to be
1.9% and Rs.3,916 respectively which were very low.
EL in PSL
As already stated, EL has been included under PSL since 1969. Following the
recommendations of an RBI Internal Working Group on Priority Sector
Lending [Chairman: C S Murthy (2007)], EL to individuals, including vocational
courses up to Rs.1 million for studies in India and Rs.2 million for studies
abroad, came to be included under PSL from 2008 onwards.
Charts 6 to 11 present a vivid analysis of EL vis-à-vis PSL in respect of Public
Sector Banks (PSBs).
6 Penetration Ratio is defined as number of EL accounts as % of people in the 18-23 age-group and Density Ratio as amount of EL per person in the 18-23 age-group.
11
PSBs: EL
1969 1974 1979 1984 19880
10
20
30
40
50
60
70
80
0.00
0.10
0.20
0.30
0.40
0.50
0.60
Chart 6: 1969 to 1988 (June-end)
No. of Accounts (000) (Left Axis)Amount (Rs. billion) (Right Axis)
1990 1995 2000 2005 2010 2012 2013 20140
500
1000
1500
2000
2500
3000
0
100
200
300
400
500
600
Chart 7: 1990 to 2014 (March-end)
No. of Accounts (000) (Left Axis)Amount (Rs. billion) (Right Axis)
PSBs: Share of EL in PSL
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
Chart 8: 1969 to 1988
Account Amount
0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%
Chart 9: 1990 to 2014
Account Amount
PSBs: EL: Average per Account (Rs.)
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
8,0
00
4,1
20
5,2
11
4,0
00
3,1
68
2,9
83
3,1
29
2,4
68
2,3
95
2,1
63
2,1
91
2,5
00
2,7
50
3,2
56
3,6
96
4,5
83
4,4
83
5,3
45
5,5
88 6,8
06
Chart 10: 1969 to 1988
90 92 94 96 982000 02 04 06 08 10 12 14
9,3
06
11,
000
15,
362
17,
727
20,
000
22,
571
24,
730
24,
561
40,
122
32,
847
67,
875
91,
786
97,
261
120
,084
1
20,4
32
136
,128
1
68,5
49
139
,840
1
62,5
35
172
,207
1
87,6
24
186
,979
1
96,9
11
205
,709
2
15,5
32
Chart 11: 1990 To 2014
Source: http://www.indiabudget.nic.in/ and http://dbie.rbi.org.in/
12
Number of accounts and amount outstanding: During 1969-88, both the
number of accounts and amount increased sharply from 1979 onwards. For
the entire period, CAGRs were 25.2% and 24.2% in terms of number of
accounts and amount respectively. During 1990-2014, both rose sharply from
2005 onwards. Over the entire period, CAGRs were 16% (number of
accounts) and 32.3% (amount).
Share in PSL: During 1969-88, the share of EL, both in terms of number of
accounts and amount, fell sharply from June 1972 onwards from their peaks
in the previous year and remained below the peaks thereafter. During 1990-
2014, both number of accounts and amount increased from the outset, but
sharply from March 2002 onwards. Both remained much above 4% from
March 2010 onwards. However, 2013 onwards, deceleration in both set in
with the EL/PSL ratio in terms of amount plunging below 4%.
Per Account Loan: During 1969-88, average amount of loan per account
initially fell up to 1978 but thereafter increased almost steadily. During 1990-
2014, the average showed a consistently upward movement right from 1990
onwards.
Bank Group-wise Analysis
Chart 12 presents the shares of State Bank Group (SBG), Nationalized Banks
(NBs) and Private Banks (PVTBs) in terms of number of accounts and amount
as obtained at March-end 2014.
29.8%
65.4%
4.8% 32.2%
64.2%
3.6%
Chart 12: Bank Group-wise Share In EL
SBG (6) NBs (20)PVTBs (19)
Inner/Outer circle: Number of Accounts/Amount. Source: ibid.
13
The participation of private banks was minimal, whereas the performance of
SBG was laudable.
Bank-wise Analysis
Chart 13 presents the bank-wise share in amount as at end-March 2014.
24.2%
8.5%
6.6%
6.4%5.9%5.6%
4.7%4.7%
4.5%
3.7%
25.1%
Chart 13: Bank-wise Share in Amount
SBI Canara PNB IOB IndianCentral Syndicate BoI SBT UnionRest 16 PSBs
Source: ibid. Computation ours.
SBI was the market leader with almost a quarter share in the total. While 9
other banks, combined together, had over a half, rest 16 banks had to share
another quarter. Thus, there were many PSBs which were nearly dormant.
We found a negative correlation, though weak, between the absolute amount
outstanding and the amount per account. This meant that there were many
banks with a few accounts but with larger amount per account, indicating
credit concentration which goes against the sound principles of credit
management.
Incidence of EL in Non-PSL
As mentioned earlier, loans up to Rs.2 million are included under PSL. We
estimated the amount outstanding against EL outside PSL, i.e. above Rs.2
million. As at March-end 2008, amount outstanding against such accounts
was Rs.194 billion which steadily increased to Rs.579 billion at March-end
2014. However, as proportion of total EL amount outstanding, it generally
declined from 5.3% to 3.5% over the same period.
14
15
Loan Delinquency
The last 3 to 4 years have witnessed a lot of noise about the so-called high
NPA level in EL. However, there are no data available in the public domain,
even at a very broad level, let alone precise. Aggregate data can be
misleading, as it would be difficult to ascertain (a) ‘actual’ and ‘technical’7 NPA
and (b) incidence of NPA region/State-wise, bank-group/bank-wise, loan
limit/social category/gender-wise, etc. Problem assessment will be arduous
without these kinds of data. Unavailability of EL NPA data in the public
domain is corroborated by Kaveri8 who, based on newspaper reports and
informal sources, had put the EL NPA at 6% for 2011-12. Our informal enquiry
with 7 PSBs revealed that the EL NPA ratio varied between 0.25% and 12%.
The hullabaloo as to EL NPA had led Pranab Mukherjee, the then Finance
Minister, to introduce in the Budget (2009-10) the Central Scheme for Interest
Subsidy for ELs disbursed after 1.4.2009. The scheme was extended in 2014
by P. Chidambaram, the then Finance Minister, in his Interim Budget.
But the question remains why is this opacity as to the database pertaining to
EL NPA, especially when it is being said to be high?
In the absence of data, we have taken NPA for PL, of which EL is a
constituent, as a ‘crude’ proxy. Our logic is: if EL NPA is high, then it will
greatly influence the overall level of sectoral NPA. Table 3 presents the
distribution of 26 PSBs according to PL NPA.
7 ‘Technical’ NPA arises out of non-feeding of proper repayment schedule into the Core Banking Solution of banks.8 Kaveri, V S (2012): NPAs in Education Loan – An Overview, The Indian Banker, Volume VII, No.9, September 2012.
16
Table 3: PL NPAs –Distribution of PSBs
NPA Ratio (%) No. < 1 2> 1 < 2 8> 2 < 3 6> 3 < 4 2> 4 < 5 1> 5 < 6 3> 6 < 7 2> 7 < 9 1> 15 1Total 26
Source: Bank Annual Reports.
In 16 banks, the ratio remained below 3%. Moreover, the ratios were
generally far below those for agriculture, industries and services sectors.
It could be that the banks which had lent to less number of borrowers had
larger incidence of NPA. To test this we calculated the rank correlation
coefficient between (1) number of EL accounts under PSL and (2) NPA
percentage in PL in respect of 10 PSBs which had PL NPA at above 3%. The
correlation coefficient was -0.382. The ‘negative’ sign indicates that the 10
banks might have lent to relatively less number of borrowers and perhaps the
concentration risk did not pay off. The average number of EL accounts for the
10 banks was 71,306 compared to 1,15,190 for the 16 banks.
How severe is EL NPA?
First, it may be recalled that the share of EL in NFL and PL varied in the range
of 0.6 to 1.2% and 2.2 to 6.4% respectively over the period 2006 to 2015 (up
to February). The values of incremental ratios indicated that those were under
leash too. Furthermore, as at March-end 2014, the share of EL in PSL was
3.4% in terms of amount. We reckon that these shares are too low to engineer
any deleterious impact.
Second, let us carry out a simple stress test by hypothetically assuming that
as high as one-fifth of the EL amount outstanding as at March-end 2014, i.e.,
Rs.120 billion turn into NPA. If so,
17
i. It will erode 2.55% of the Net Owned Funds of the public and private
sector banks.
ii. It will be below 5% of total NPA of PSBs
iii. It will be 29% less than the amount blocked in top 30 suit-field accounts
iv. It will be 58% below the total NPA concentrated in top 4 borrowers of
PSBs
v. One-fifth of the incremental amount in EL portfolio in 2013-14, i.e.,
Rs.10 billion constitutes only 1.4% of net profit of the public and private
sector banks
Therefore, we conclude that NPA in the EL portfolio is too small to make any
wild splash!
Some bankers argue that since the employment situation has been bleak for
last 4 to 5 years, why should banks lend to students? Extrapolated, this would
mean why should we educate our children after all, if jobs are not available?
The solution lies in creating jobs, not in stopping them from acquiring higher
education. Secondly, tomorrow when the economy picks up consequent upon
cyclical upturn and if our human resources are not equipped to take on the
revival, are we going to import talent and skill from abroad like many Middle
East and African countries do? Therefore, creating industrial/services capacity
and bolstering skill and talent should go simultaneously.
The overall fear psychosis against NPA that has gripped bankers has its
origin elsewhere and relate to some time for which students are in no way
responsible. Therefore, this psychosis should not be allowed to cast its long
shadow on the future of the young ones who are expected to lead the country
tomorrow.
In a word, EL NPA is not as serious as it is made out to be. Even if banks
deem it serious, it is well within their powers and means to control it, instead
of curtailing the availability of EL.
Section 3: Country Experiences
Bank loan is fast emerging as a significant route for students to finance their
higher education. Banks all over the world have also responded equally well
to this demand. Today, in over 80 countries, commercial banks provide loans
18
to students for higher education. Notable examples include China (State
commercial banks), Korea (the Ministry of Education Scheme), Canada (until
2000), and the US. In Canada, for 3 decades from mid-1960s to mid-1990s
commercial banks were responsible for student loan financing, disbursement
and recovery. But the 100% repayment default guarantee made banks lazy to
recover the loans and default rates increased phenomenally. Subsequently, in
the latter half of 1990s, banks assumed the default risk but were
compensated by a 5% risk premium. However, banks wanted the
compensation to go beyond 10% and thus, the scheme was considered as
unsustainable. In 2000, the government assumed the responsibility for loan
scheme funding.
According to a Pew Research Centre report (October 2014), in the US: (a)
student indebtedness recently rose, especially from the relatively upper-
middle income group families; (b) more of graduates are borrowing; (c)
students whose parents are more educated are borrowing more; (d) loan
delinquency has increased; (e) increased student indebtedness has adversely
affected the credit profile of graduates in the beginning of their professional
career; and (f) female-borrowers are increasing. In addition, several proposals
are afloat to relieve the educational debt burden which include student debt
forgiveness (a euphemism for waiver) to varying extent.
Section 4: Policy Issues
While enunciating the undernoted policies, we have tried to balance student-
borrower friendliness and bank profitability.
First, the imperatives should be crystal clear before the policy makers and
executors. The imperatives are:
1. The economy should achieve 8-10% growth consistently
2. Gross Enrolment Ratio in higher education should increase to 30% by
2020
3. The country needs a gargantuan talent and skill base in almost all
fields
4. Available public finance is too meagre to develop the required skill and
talent base, adequately and appropriately
19
5. Therefore, obviously, the private sector has to be roped in
6. Except a very few, the private non-financial sector is not coming
forward – either commercially or philanthropically
7. Hence the financial institutions’ support, especially PSBs
The academia is divided over whether higher expenditure in education leads
to higher economic growth. However, intuitively, we believe that there exists a
positive correlation between the two.
Our policy analysis is carried under the following heads:
Waiver
We fully agree with the RBI Governor that ‘waiver’ or ‘interest subvention’
should never be resorted to loans for any purpose. Waivers have serious
distributional effects as these discriminate, particularly when constricted by
income criterion, and it also goes against the basic tenets of sound lending. It
pollutes the entire credit culture. For example, in the farm sector, instead of
frittering away time, energy and resources on waivers if proper schemes of
agricultural insurance or weather-resistant crops or irrigation were
implemented, it would have been far more fructuous. Farmers needed to be
psychologically empowered to take on risks, and this could have been
possible by armoring them with risk-mitigating weapons. If banks expose the
student-borrowers to ‘waiver’ or ‘interest subvention’ at the outset of their
career, they may expect more of it in future for all their loans and become
rogue debtors. Or, maybe her/his friends/relatives would take loans expecting
waiver/subvention.
Interest Rate – The Key
There could be just one solution to the EL NPA imbroglio, if banks feel it to be
so. Banks should provide the basic EL at Base Rate. This will make loans
cheaper and evoke voluntary, smooth and better repayment by the student-
borrowers. In fact, banks are blocking the transmission of RBI monetary policy
measures due to their own problems precipitated by several factors which are
exogenous to students. Therefore, it would be illogical to ask the meritorious
students to bear the brunt of this. Banks should treat EL as a low-margin,
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high-volume business. Once the rate of interest is reduced, there is no need
to classify EL under PSL. Banks are ‘special’, so should be the student loans.
Hiking Loan Limits
The student loan limits should be revised every three years. The Central
Statistics Office should design an exclusive, realistic price index for the
Education sector. The revisions in loan limits should be linked to the
movements in the proposed index.
Repayment
Banks may think of exploring alternative repayment mechanisms which can
be easier and beneficial to both the student-borrowers and bank. Income-
contingent repayment is gaining currency in many developed countries. The
mortgage-type repayment mechanism being followed today with fixed
repayment instalments, decided ex ante irrespective of the earnings of the
student after studies, proves onerous, as students generally earn less initially.
In other words, mortgage-type repayment is income-invariant. As against this,
income-contingent repayment plans involve repayment in terms of a fixed
percentage of the salary earned by the student-borrower. It is like dividend
earned by a shareholder. As the earnings of the student-borrower increase
over time, banks can get increasing amount as their repayment instalments.
The former can also easily afford this. Moreover, it is fixed ex post. The bank
and the student-borrower can alter the percentage on mutual understanding.
This needs deeper research.
Banks may explore possibilities of collecting repayment amount through
Income Tax Department or universities.
Monitoring Essential
Monitoring student-borrowers is difficult, since they go to different places for
employment. It has been demonstrated that maintaining close relationship
with borrowers can lead to better recovery of bank loans.9 Therefore, to
9 Rajan, R.G., Zingales, L. (1999). “Which capitalism? Lessons from the East Asian Crisis”. Journal of Applied Corporate Finance 11, 40–48, as referred by Ross Levine in “Finance and Growth: Theory And Evidence” (Chapter 12)
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ameliorate this risk, banks have to beef up their monitoring and follow-up
mechanism. Since physical monitoring of a large number of student-borrowers
is time-consuming and costly, technology and social media can be extensively
harnessed to keep track of them. Today, in Facebook, for example, people
can track even their long-lost friends. Banks can also equally do that.
However, banks must desist from ‘naming and shaming’ the defaulting
student-borrowers in public or else, the ensuing collateral socio-economic
damage will outstrip the damage due to NPA.
Credit GuaranteeThe National Credit Guarantee Trustee Company aimed at providing
guarantee cover to banks for EL is being set up, which may become a source
of comfort for banks. However, the guarantee scheme should promote a
healthy credit culture, not make the system lackadaisical as was observed in
Canada. Moreover, the guarantee fee should not be too high for banks to
desert the scheme as happened with the small loans credit guarantee
schemes earlier administered by DICGC.
Look beyond Loans
Banks should look at the student-borrower as a potential business source in
future. Banks should not be myopic by burying in oblivion the student-
borrower after the loan disbursement. Instead, if a consistent relationship is
nurtured with a student-borrower, s/he can bring in several business
opportunities in the form of subscribing to both liability and asset side
products of the bank as well as services. Today’s young workers need loans
for buying house, vehicle and durables, and children’s education. Banks can
cross-sell their insurance (already there is an option for taking insurance
policy while availing of EL) and capital market related products. Banks can
also help the student-borrower in money transfer or remittances and earn
fees, both during the studentship as well as afterwards. Indians generally do
not forget their roots. India is the topmost destination in the world for overseas
inward remittance.10 In fact, some of the private banks have tie-ups with
coaching-cum-counselling centres for students aspiring to go abroad for
higher studies and these banks provide remittance and foreign exchange
10 World Bank database (2014)
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services to the selected students from the coaching centres at concessional
rates. Internal remittance is equally high.
In a word, banks should perceive the student-borrower not only as their
present customer but as their future business partner too. That will be a more
comprehensive way of looking at student loans.
Increasing Bank Participation
Private sector banks should participate wholeheartedly. Bharatiya Mahila
Bank, the exclusive bank for women, should take the responsibility of EL for
women. Many female-borrowers drop out from college/university after
marriage. In such situations, women-lenders can motivate their borrower
counterparts better than men.
Data Availability
A sound database needs to be created on various micro-level attributes of EL.
CSR Support
Commercial involvement of banks in developing high-end HR via EL should
be buttressed by their CSR activities. CSR is important for any corporate,
particularly banks which are “agents” of socio-economic change. Every bank
earmarks a certain percentage of its yearly profit towards undertaking CSR
activities. It is fine that banks donate ambulances, water coolers, fans, etc.,
but they can also support R&D through CSR. For example, banks can institute
endowment chairs in important universities/institutions.
Universities/institutions in several advanced countries are replete with such
chairs sponsored by commercial entities. They can also sponsor projects for
mutual benefits. Banking as a discipline in India is research-starved. Banks
can take initiatives to mitigate this. If private corporates can establish
universities, why can’t banks? Like village adoption, individual banks can even
adopt a university/institution. Banks themselves can benefit from such
sponsorship when it comes to recruitment. This will help banks accomplish
their CSR objectives too. Banks may sponsor national and international
seminars, conferences, etc., which will enhance their image too.
Section 5: Concluding Remarks
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Banks can and should play a highly significant role, in various direct and
indirect ways, to foster human resources in an aggressive manner in all
categories of population and income groups. Thus, EL should not be looked
upon as a ‘commercial’ venture alone; it should be treated as serving a ‘noble
cause’. Intrinsically, it would be wrong to equate or club EL with other PLs like
home, vehicle and consumer durables loans, as their objectives and
customers are poles apart. A committee of bankers and researchers should
make a comprehensive study and bring in further modifications in banks’
engagement in harnessing the country’s human talent, keeping the ultimate
goal of building a strong economy, sustainably and equitably, in view.