High rate of defaults symptomatic of a bigger malaise

Arshad Shaikh studies the trend of many students defaulting on their education loans taken to complete higher studies. Merely sympathising with the students is not enough; we need to understand the root cause of the problem and analyse the issue in terms of the education system, our economy, and the role of banks in education. There are no quick-fix solutions, and it requires a rethink of the very fundamentals with which we approach the design of various structures that constitute our society and its systems.

The numbers related to education loans to students point out the many problems plaguing our economy, education system and the way credit is extended in the market. A newspaper report pointed out that 8% of all education loans extended to students by 12 Public Sector Banks (PSBs) had turned into Non-Performing Assets (NPAs) or bad loans.

The PSBs of India account for over 90% of all education loans. Fours PSBs namely the State Bank of India, Canara Bank, Union Bank of India and Indian Overseas Bank make up 65% of these loans. Private Banks disburse only 7% of all education loans while Regional Rural Banks (RRBs) account for around 3%. The high default rate on these loans set alarm bells and made banks more precautious.

Consequently, this year the total amount of education loans dropped to `20,450 crore. Last year, an amount of `23,640 crore was disbursed to students. The loan disbursal target was also reduced by 13.5%. This is in continuation of a trend reported in the pre-Covid era wherein India’s education loan market reduced by 25% from 2015 to 2019.

However, the average ticket-size of the loan increased substantially. It means that banks favour the high-end of the market and prefer value to volume. One reason for this classist approach in picking debtors is the fact that a majority of the defaults on the loans are in the category of low-value education loans i.e. loans up to `7.5 lakhs. In sharp contrast, the default rate for education loans to students from top-rated institutes is less than half a per cent.

Banks follow the Indian Banks’ Association (IBA) model for loan disbursement to students who are aspiring to pursue higher studies domestically and abroad. As per the IBA model, loans of up to Rs four lakhs are granted without collateral while those up to `7.5 lakhs require collateral in the form of a suitable third-party guarantee. Education loans above Rs 7.5 lakhs mandate tangible collateral. In all these categories, the co-obligation of parents is compulsory. By June 2022, (end of Q1 of FY 2022-23) the total outstanding education loan in the market stood at `79,900 crore of which `6,246 crore had turned non-performing.

Some issues beg to be analysed. Why is higher education so expensive in India that students have to take bank loans to fund their graduation, post-grad and doctoral studies? Why do Indians make a beeline to study abroad? What causes a default on education loans? How much do banks charge for education loans and is it justified? The answers to these questions may reveal the malaise breeding within our political economy that needs to be fixed sooner rather than later.

EXPENSIVE HIGHER EDUCATION

India has 580 million people in the age group 6-24 years. That is more than any other country in the world. According to estimates, India’s education market is projected to reach $225 billion (`18 lakh crore) by FY 2024-25. India has 15 lakh schools, with more than 25 crore children going to school. This makes up half the education market.

India has 1,043 universities with 42,343 colleges and around 11,779 stand-alone institutions. Gross Enrolment Ration (GER) is the total enrolment in a specific level of education as a percentage of the eligible population size for that level. With a GER of 27.1% for higher education (beyond K-12), India ranks third behind China and the United States.

In 2019-20 we had 3.85 crore students enrolled in various colleges and universities for pursuing higher education. The cost of K-12 (Kindergarten until Standard XII) education in private schools ranges from `60,000 to `1.2 lakhs. The cost of engineering studies in a good college cost between `4 lakhs to 20 lakhs. Even the IITs charge anything between `8-12 lakhs for general category students. Private medical colleges expect students to shell out upwards of `25 lakhs and many a time even a crore.

Similar is the case with private business and law schools that enjoy a good reputation. India’s median salary is less than `30,000 a month. It means about half the earning population has an annual income of less than `3.6 lakhs. With such huge costs of higher education and such meagre incomes, the aspirational middle class has no choice but to look for education loans to fund the college education of their children. 

THE GOVERNMENT WITHDRAWAL FROM HIGHER EDUCATION

Despite increasing revenues (from taxation and other sources), the expenditure on higher education by both the Centre and the States has been declining steadily. The Central government’s expenditure on higher education declined from 0.33% of GDP in 2010-11 to 0.16% in 2019-20.

India allocates a mere 3% of its budget towards education. This is half of what its NEP aspires to and many experts have suggested (that is 6% of the GDP). Our education minister stated in Parliament that – “people should give up the idea that universities should be funded by the government.”

The General Financial Rules, 2017 issued by the Department of Expenditure, Ministry of Finance states – “all autonomous organisations, new or already in existence should be encouraged to maximise the generation of internal resources and eventually attain self-sufficiency.”

The simple message of the government is – “We are withdrawing from higher education and handing it over to the private sector.”

The problem with the privatisation of higher education is the absolute reliance on donations and exorbitant fees to fund itself and the transformation of universities from centres of learning into centres of profit and income. This makes higher education inaccessible to the vast majority of the underprivileged, depriving them of their fundamental rights as citizens of the country.

BANK LOANS AND DEFAULTS

Each year around seven lakh to a million Chinese students choose to study abroad. Many of these students receive scholarships from the Chinese government to fund their studies abroad. In contrast, the number of Indians who go to foreign countries every year for pursuing higher education is close to two lakhs. Not many receive any scholarship from the Government of India.

For domestic studies, the interest rate on loans charged by banks is around 11% per annum while for foreign studies the interest rate is 13.5%. The loan period is typically 15 years after the completion of the course. This means that the student typically ends up paying double the amount loaned from the bank. Is there any justification for such an unfair practice?

In the case of India, the economy is extremely sluggish from the point of view of generating gainful employment. No wonder, the default rate on education loans is so high. Author Steward Stafford correctly opines, “Education is the way out of the poverty trap. It shouldn’t be the poverty trap itself and make those trying to better themselves incur massive student debt.”

We need to re-look at our entire system of extending credit to those who need it. The principle of charging interest for loaning money should be examined afresh. Maybe charging interest is not in anybody’s interest.

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