Bankers trip over student loans

Education loans at Rs 8,000 crore, sticky assets touch 6-8 per cent.

Students seem to be giving bankers a run for their money, literally. Stung by a growing number of sticky educational loans, a working group of the Indian Banks' Association (IBA), the premier bankers' body in the country, has now suggested setting up of a credit guarantee fund with a corpus of Rs 250 crore on the lines of the credit guarantee trust scheme for small industries (CGTSI).

The banking industry's total exposure to this sector had been around Rs 8,000 crore, banking sources said. Some banks have accumulated as much as 6 to 8 per cent sticky assets in educational loans.

The genesis of this can be the aggression to build educational loan portfolios. Some public sector banks have disbursed sizeable amounts of educational loans over the last two years.

To tide over this, the IBA managing committee has suggested that a special fund be created by individual banks to meet educational loan losses and seek tax exemption for contribution to the loan-loss fund.

The concern among bankers is that they are unable to track students availing of educational loans after completion of studies. This made them knock at the doors of Finance Minister P Chidambaram in search of a solution. The advice from Chidambaram to the IBA was to set up a working group to explore ways to track the students who had borrowed.

All these efforts, particularly by public sector banks, are meant to protect their educational loan portfolios. Education is a national priority and the finance minister, in his 2005-06 Budget speech, had reiterated that educational loans would be given liberally to students.

"We are giving these loans liberally but often we are unable to track the borrowers, particularly those who are going overseas," said a senior banker.

The IBA working group has also recommended that students be given loans from bank branches situated close to their permanent homes. The other suggestion is that the guardians or parents of students taking loans should be made co-obligants or joint borrowers to make them liable for repayment.

Banking sources said making parents co-borrowers even if they did not have the capacity to repay would help in tracking borrowers after they completed their studies.

"But, not all parents will accept this idea," said another banker.

The education loan portfolio has seen a sharp increase since the finance minister first made a statement on such loans in his 2004-05 Budget speech. The portfolio has increased over three-fold from Rs 2,249 crore (1.4 lakh borrowers) at the end of December 2004 to around Rs 8,000 crore now.