The Hindu Business Line : Education loans: `Parents must co-borrow'

While rejecting the proposal to impound exam certificates and bar-coding of passports as measures to minimise defaults on education loans, a working group set up by the Indian Banks' Association (IBA) has come up with alternative suggestions to make it mandatory for parents or guardians, of the student borrowing loans, to be co-borrowers thereby making them liable for repayment.

The group has also suggested that banks may consider disbursing loans from branches situated close to the permanent residence of the student-borrower.

The suggestions come amidst rising concern among public sector banks on the steady increase in defaults on education loan portfolio. Banks have been finding it difficult to pursue recovery of loan since may of those who have availed themselves of the loan reside abroad and also change their address frequently without informing the lender.

Cushion corpus

The working group has also suggested the setting up of a Rs 250-crore Credit Guarantee Fund on the lines of the Credit Guarantee Trust Scheme for small-scale industries to provide cushion to banks on loan defaults.

The group has suggested that one half of the corpus would be funded by the Central Government while the other half could shared by the banks and the borrower.

The suggestions are under consideration of the Reserve Bank of India and the Ministry of Finance.

Earlier, banks had suggested that they should be either allowed to take possession of the exam certificates of the student at the time of disbursing the loan or arrangements should be made for bar coding and radio frequency identification (RFI) on the passport or visa documents of the student-borrower that would hold details of the loan availed.

However, the working group had found that both suggestions were not workable. It had pointed out that taking possession of exam certificates would harm the students' prospects of getting employment at a future date while bar coding/RFI would be a cumbersome process that would require multiple arrangements with embassies, consulates and universities.

Education loans extended by public sector banks at soft rates are a hit with the student community and have been witnessing steady increase ever since the scheme was introduced in 2001.

According to latest figures, at the end of December 31, 2005, the total outstanding loans of PSU banks under the portfolio stood at Rs 9,419 crore in 6,45,077 loan accounts. This is against the total outstanding of Rs 6,713.16 crore at the end of fiscal 2004-05 against 4,68,207 loan accounts.

While incremental disbursals during 2004-05 stood at Rs 2,163 crore against 1,48,870 accounts, new loans disbursed during the first nine months of 2005-06 were Rs 2,705 crore in 1,76,870 accounts.

Besides being extended at softer rates, educational loans up to Rs 7.5 lakhs are given to meritorious students without collaterals.

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