ROLE OF EDUCATION LOAN IN INDIAN HIGHER EDUCATION

ROLE OF EDUCATION LOAN IN INDIAN HIGHER EDUCATION RAJESH TIWARI*; DR. BIMAL ANJUM** *ASSISTANT PROFESSOR, ASIA PACIFIC INSTITUTE OF INFORMATION TECHNOLOGY PANIPAT, HARYANA **ASSISTANT PROFESSOR, DEPARTMENT OF COMMERCE, DAV, COLLEGE CHANDIGARH ABSTRACT: The paper explores the role of educational loans for development of human capital in India. For a country with the largest population of young people (704 million), combined with a poor gross enrollment ratio, availability of educational loan is a necessity to ensure supply of skilled manpower for the economic progress of the country and to improve wealth distribution. The move towards privatization of higher education and poor budgetary support further increases the importance of educational loans for the country. For every 1% rise in GDP, demand for education loan rises by 3% (Chakraborty, 2011). In spite of consistent rise in outstanding amount and accounts of educational loans the issues of poor access to banking services, complaints regarding rejection of loans by banks and neglect of vocational education require urgent attention by the stakeholders. The proactive and student friendly approach by the new finance minister provides hope to millions of deserving students to get access to educational loans. The paper concludes with recommendations on enhancing the utility of the educational loans to improve access and employability of the students. KEYWORDS: GDP, Gross Enrollment Ratio, Access, Employability 1. Introduction: The higher education sector in India has gone tremendous change in the last few years. Growing demand and lack of capacity in public sector institutions and withdrawal of government s budgetary support has led to exponential growth in the private higher education institutions. But is it adding value to the society and justifying its presence to the stakeholders? Are we moving towards a scenario of better access, quality and governance? The paper dwells on these issues with regards to access to higher education through education loans. Table 1 shows the significant contribution of private sector in higher education. Table1: Distribution of Universities in India (as on September 2012) Type of Institution (Total 613) Contribution Central Universities 44 7% State Universities 299 49% Private Universities 140 23% Deemed Universities 130 21% Source: University Grants Commission 89

2. Need of Education Loan: The need for a robust system of higher education financing arises on account of demographic challenges, trend towards privatization, and poor budgetary support. 2.1 Demographic Challenges: India has one of the largest populations (704 million) of young people below 30 years of age. (Euromonitor, 2012). To provide gainful employment higher education is important. The access of good higher education will contribute towards development of human capital necessary to take the economy to new heights. Table 2 shows the projected trend of population. The population of people in working age forms the largest section of the population. The population of people in age group of 15-64years is expected to rise to 908 million by 2021. Providing skill enhancement opportunities to such a large population is a great challenge. Table 3 shows lower expenditure on education as compared to other countries. Vision of 12 th five year plan (2012-17) on higher education is Achieve further access to higher education through a mission mode national programme of creating new universities and increasing the intake capacity of the existing universities and colleges. Access is real opportunities for everyone to avail themselves of high quality, meaningful education at affordable rates (Mahajan, 2012). In India the Gross Enrollment Ratio (GER) of 13.5% is almost half of World Average (24), about two third of developing countries (18%) and significantly lower than developed countries (58%) (UGC, 2012). 12 th Five Year Plan (FYP) (2012-17) targets a GER of 30% (UGC, 2012). The easy availability of education loans will provide the resources to improve the gross enrollment ratio. This is all the more important due to increasing dependence on private sector for higher education. The number of engineers per million people, India has only 214 with South Korea having the highest number 1435. While Japan has 765 engineers per million people, China has 340. The doctorate degrees are less than 1 per cent of graduate engineering degrees in the country. The percentage of doctorate degrees compared to engineering degrees is much higher in most of the other countries, e.g., 9 per cent in the US, 10 per cent in the UK, 8 per cent in Germany and 3 per cent in South Korea (Chakraborti, 2011). Table 2: Population Projection of India (in Millions) Year 2001 2006 2011 2016 2021 2026 Total 1,029 1,112 1,193 1,269 1,340 1,400 Below 15 years 364 357 347 340 337 327 15-64 years 613 699 780 851 908 957 Above 65 years 49 56 66 78 95 116 Source: Reserve Bank of India 90

Table 3: Expenditure on Education (Human Development Report 2011) Spending on Education as Spending on Education as a Country a percentage of GDP Country percentage of GDP Denmark 7.8 UK 5.5 Norway 6.8 South Africa 5.4 Sweden 6.6 Switzerland 5.2 New Zealand 6.1 Brazil 5.1 France 5.6 Russia 3.9 United States 5.5 India 3.1 Source: UNDP 2.2 Trend towards Privatization: The participation of private sector is increasing day by day. The budgetary support for higher education is low, with the central government funding on higher education at 1.25% of GDP (UGC, 2012). Private institutes now account for four-fifths of the enrollment in professional higher education and one-third in overall higher education. According to the FICCI and Ernst &Young report on higher education 91% engineering schools, 95% pharmacy, 64% business and 50% medical schools in India are non-government. The national skill development corporation has the target is to cover 500 million people cumulatively by 2022 under skill development programs. The national skill development policy recognizes that 93 per cent of the country s workforce is in the unorganized sector, but contributes only 60 per cent of GDP. 3. Current Status of Education Loans: Education loans include loans and advances granted to only individuals for educational purposes up to `10 lakh for studies in India and `20 lakh for studies abroad, and do not include those granted to institutions (Reserve Bank of India). Recent estimates suggest that for every one percent increase in GDP, demand for education loan increases by 3 per cent, and demand for housing loans increases by 5 per cent (Chakraborty, 2011). Indian banks association (IBA) prepared a Model Educational Loan Scheme in the year 2001 which was advised to banks for implementation by Reserve Bank of India in 28 April, 2001. The scheme was subsequently modified by IBA from time to time. Table 3 shows the revised guidelines of the Indian Banks Association. The education loan is expected to grow at a rate of 32.3 per cent in 2009-10 and at 39.8 per cent each in 2010-11 and 2011-12 and 44.8 per cent during the period 2012-13 to 2014-15(Chakraborty, 2009) 91

Table 4: Norms of Education Loan Limit of Loan For Studies in India For Studies abroad Rate of Interest Security Norms Up to Rs. 4 lakhs Rs. 10 lakhs Rs. 20 lakhs Interest to be charged at rates linked to the Base rate as decided by individual banks No Security, Parents to be joint borrowers Above Rs. 4 lakhs and Up to Rs. 7.5 lakhs Above Rs. 7.5 lakhs Repayment Schedule For loans up to Rs. 7.5 lakhs For loans above Rs. 7.5 lakhs Margin Up to Rs. 4 lakhs Nil Above Rs. 4 lakhs (Studies in India) 5% Studies abroad 15% Collateral security in the form of suitable third party guarantee; parents to execute the document as joint borrowers. However the bank may waive the third party guarantee if satisfied with net worth of parents. Parent(s) to be joint borrowers. Tangible collateral security of suitable value acceptable to bank, and assignment of future income of the student for payment of installments Up to 10 years Up to 15 years Disposal of loan application Source: Indian Banks Association 15 days to 1 month, but not exceeding the time norms stipulated for disposing of loan applications under priority sector lending. The banks are adopting a cautious approach in sanctioning the education loans which is detrimental to increase the access of higher education. In a recent meeting with chiefs of public sector banks the new finance minister, Mr. P.Chidambaram, said "One case of application rejection or two cases may be an oversight issue, but if the branch reaches a critical number like five or ten cases of rejection then there can be action against the manager," This is a move prompted by large number of complaints for rejecting applications for educational loans. There are about 5200 complaints in educational loan including denial of loans (Verma, Suneja, 2012). Justice D Hariparanthaman commented while delivering a verdict in a case of denial of education loan by Punjab National Bank that Banks can t deny education loans on the condition that the academic performance of the student was poor in school.(times, 2012) According to the revised guidelines of IBA students taking admission in private institutions under management quota will also be eligible for the bank educational loans. But the fees under 92

management quota to be considered up to the limit fixed by regulatory bodies for the payment seats. The scope of courses has been expanded now and covers any degree/diploma approved by a regulatory body. Finance ministry has recommended banks to enter into MoU with educational institutions to provide loans to the students (Kumar, 2012). Joint efforts by banks and government bodies will increase the reach of the loan faculties and speedy approvals. In an education loan mela (fair) organized in October 2012 by district administration in Madurai, 1800 applications were received in a single day. 25 banks participated in the mela (fair) (Times, 2012). Indian Bank Association has recommended concession of 0.5% in education loans for girl students. IBA recommends 1% interest concession may be provided by the bank, if interest is serviced during the study period and subsequent moratorium period prior to commencement of repayment. Table 5: Growth of Educational Loan Accounts Year No. of A/c of Educational Loans 2005 468207 2006 679945 2007 944397 20085 1246870 2009 1603385 2010 1911460 2011 2326812 2012* 2460000 Note: *till March 2012 Source: Ministry of Finance, Business Line Table 6: Growth Trend of Outstanding Amount of Educational Loan Year Outstanding Amount (Rs. In crore) 2005 6,713 2006 10,012 2007 14,283 20085 19,817 2009 27,646 2010 35,887 2011 47,591 2012* 49,069 Note: *till March, 2012 Source: Ministry of Finance, Business Line 93

3.1 The Chinese Scenario: From 1990 to 1997, the tuition fees of China s institutions of higher learning increased at an average annual rate of over 20 percent. (China.org.cn). To help qualified students who cannot afford tuition fees, the state, while continuing to promote the reform of the school charges system, allocated 744.7 million Yuan of special funds in eight batches from 1994 to 1999 to subsidize such students, and backed this up with a series of steps, including scholarships, loans, stipends, subsidies and reduction or exemption from tuition fees. In China a student may receive a yearly loan of 8,000 Yuan (69596 INR as on 8 th November 2012). The term of a loan is generally less than eight years. The financing for higher education is through multiple support mechanism of government funding, scholarships, education loans, stipends have yielded good results and now nine Chinese universities have been ranked among top 400 by times higher education network in 2012. The gross enrollment of China was lower than India but improved significantly after 2002 and now it is almost double the enrollment ratio of India (Goswami, 2012), as shown in figure1. Figure 1: Enrollment at Tertiary Level Source: UNESCO, cited in India Education Review 3.2 Vocational Education: The vocational courses offered by ITIs, ITCs, Polytechnics and other technical institutions / bodies were not covered in the Model Educational Loan Scheme formulated by Indian bank association. However to support the government initiative to improve skill enhancement Indian bank association came up with new guidelines in May 2012 for providing educational loans for students opting to undertake vocational training in recognized institutions. The courses would include Vocational / Skill development courses of duration from 2 months to 3 years. Table 7 shows the financing limits decided by Indian bank association. The guidelines have relaxed margin and collateral requirements, however the parent will execute loan document along with the student borrower as joint borrower. Interest rate to be charged linked to the base rate of 94

banks as decided by the individual banks or at reduced rate after considering the subsidy under any government schemes or any concession as decided by the bank. Table 7: Financing Limits for Vocational Studies Loan Course Duration Quantum of Finance(Rs.) 3 months 20,000 3 to 6 months 50,000 6 months to 1 year 75,000 above 1 year 1,50,000 Source: Indian Bank Association 3.3 Credit Guarantee Fund: The government is planning to come up with Credit Guarantee Fund (CGF) before the end of this fiscal (2012-13), which seeks to provide education loans up to Rs.7.5 lakh without any collateral security and third party guarantee. Under the Credit Guarantee Fund Education Trust (CGFT) scheme, education loans up to Rs.7.5 lakh without any collateral security and third party guarantee, would be covered up to 75% of the amount in default. Recommendations: Poor banking access (50% people do not have bank accounts) to a large section of people restricts the access of educational loan to meritorious and deserving students. The banking regulators and other stakeholders need to come up with a framework to provide access of educational loans through the public private partnerships and involvement of self help groups, to unbanked people. National level test could be conducted only for the remote and backward areas to identify talented students who would then be given educational loans. Provide educational loans on first priority to first generation of higher education students. Since the resources for educational expenditure are scarce in India, the reservations should only be allowed to the first generation higher education students. A student going for higher education first time in his family would be considered a first generation higher education student. Though it may sound difficult to implement. A system to prepare data of the citizens through Aadhar card like scheme may make it feasible. A family should get only one chance to get reservation or scholarship or subsidized education loan. The reservations on the basis of social castes should also include the population residing in areas devoid of basic amenities and banking services. This would enhance the access and equity expansion of higher education through educational loans. The government should reduce the budgetary allocation from the premier institutes and support private institutions in scholarships and loan guarantee for the talented students from the weaker sections. The students in the premier institute s gets subsidized education from public funds but enjoy private benefits for a longer duration. The government should only provide guarantee for the student of these institutes and increase the fees of these institutions. The premier institutes should be encouraged to replace government budgetary support with higher fees recovered through educational loans and corporate donations made by the alumni. Income tax exemption 95

may be granted to those contributing towards higher education of weaker sections. The profit motive in private higher education institutions need to be justified with the return on investment achieved by a student from the study. the private sector would have to recognize that artificially created inflation driven by unreasonable profit motives would be a constraint to our growth and development ambitions (Chakraborty, 2011) On the lines of floating rates of loan the interest rate charged should be linked to the a designated percentage of income earned by the graduate after completing the higher education. The moratorium period may be made more relaxed to incorporate the economic uncertainties. Credit Rating of the institutions on the basis of employability, infrastructure, quality of faculty, industry academia interaction must be made mandatory. The ratings will provide useful basis of comparison between institutions for students and banks to assess the repayment potential of the loan. The institutes should be allowed to recover a greater portion of the operational cost through the student fees. Dual degree program that allow students to work in industry to part finance their study and also get work experience which will improve their employability. Innovative delivery modes like e- education to reduce the operational cost and reduced fee structure, which may be easily financed through educational loans disbursed through self help groups or financial institutions will go a long way to propel India to the status of an economic superpower by capitalizing on the demographic dividend. References: Annual Report, 2011-12, Ministry of Finance, Government of India, retrieved 8 th November 2012 from http://finmin.nic.in/reports/annualreport2011-12.pdf Annual Report 2011, Peoples Bank of China, retrieved 6 th November 2012 from http://www.pbc.gov.cn/image_public/userfiles/english/upload/file/annual%20report%202011( 1).pdf Bhasin Anil, 2012, Banking the Unbanked, Cisco.com retrieved 8 th November 2012 from http://www.cisco.com/web/in/about/leadership/unbanked.html Chakraborty K.C, 2009, GenNext Banking : Issues and Perspectives, Address by Dr. K.C.Chakrabarty, Deputy Governor, Reserve Bank of India at the Panel Discussion on GenNext Banking at the 4th International Finance and Banking Conference organized by the Indian Merchant s Chamber on November 25, 2009 in Mumbai, retrieved 7 th November 2012 from http://rbi.org.in/scripts/bs_speechesview.aspx?id=448 Chakraborty K.C, 2011, Challenges and Opportunities in a Trillion Dollar Economy, Address by Deputy Governor, RBI at ASSOCHAM s National Banking Conclave on June 17, 2011 at New Delhi, retrieved 6 th November 2012 from http://www.rbi.org.in/scripts/bs_speechesview.aspx?id=577 Chakraborti K.C., 2011, Challenges for Next Generation Banking retrieved 6 th November 2012 from http://www.rbi.org.in/scripts/bs_viewbulletin.aspx?id=12342 96

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