INDIA: Soaring demand doubles student loan numbers

While the middle classes in India have traditionally pursued higher education for their children, rising aspirations among the lower-middle class and poor have led to soaring demand for student loans, despite families having to put assets on the line. The number of students applying for loans has more than doubled in five years.

"Indian parents will go to any extent to ensure that children are educated and employed. Many parents don't think twice before taking out a loan if they cannot afford the tuition fee," said Naresh Gulati, CEO of Oceanic Consultants, an agency that helps Indian students with admissions abroad.

The size of the education loans market in India, now valued at Rs430 billion (US$8.7 billion), has grown at a rate of 20% to 30% over the past few years.

According to data compiled by the Indian Banks' Association (IBA), 325,000 loan applications were received in 2009-10 compared to 148,000 in 2004-05.

And with a government target of doubling the gross enrolment ratio to 30% by 2030, which translates into 45 million students, the state may have to invest much more in financing students in higher education.

At present Indian banks will lend up to Rs1 million (US$20,300) for higher education within India and double that amount for overseas study, with interest rates varying from 10% to 15%.

Yet credit is not readily available to all. Loan applications are closely scrutinised, with banks looking at factors ranging from the student's repayment capacity to the university's status and credibility. Banks can deny loans for low-ranking institutions in India.

Loan defaults

Loans below Rs400,000 require no collateral, and this has led to problems with defaulting and bad loans, making banks reluctant to disburse educational loans without strict criteria. An estimated 4% of the Rs438 million in education loans that were outstanding in March 2011 were bad loans.

"An analysis done in 2010 shows that 62% of the loan portfolio belongs to the under-Rs400,000 category. Since banks do not have any collateral against this amount, some students who are unable to find jobs default," said Prabhuta M Vyas, senior vice-president of social banking at the IBA.

The IBA has been lobbying for three years for the government to act as guarantor against bad educational loans, he said. A credit guarantee fund would guarantee loans perceived as risky by lenders, so that banks could take risks they could not manage otherwise.

A senior official of the State Bank of India, who did not want to be named, said students from weaker sections of society were more likely to default.

"Students from the rural and semi-urban areas take up loans for courses like teacher training, hotel management or nursing. If they are not able to finish the course on time because they completed schooling only in the vernacular medium or are not able to get a job because of a slowdown or recession, the loan defaults," the official said.

"Since there is no collateral on these small-ticket loans, they end up becoming non-performing assets."

The IBA is in the process of formulating a draft scheme for the credit guarantee fund.

Linking loans to employability

Meanwhile, in a controversial move aimed at addressing bad loans, the IBA has linked educational loans with employability and has said that loans for qualified students will be approved solely on their assessment of employability and earning potential to repay the loan, rather than parental income or family wealth.

Vyas said that the revised scheme would render ineligible for loans 'non-merit' students - those who do not achieve the marks needed to qualify for courses through open competition but are admitted to places under a 'management quota' (most private institutions offer some seats to students who do not qualify) and places for which institutions charge a higher price.

The revised scheme has been sent to all banks for immediate implementation.

Student reactions have been mixed.

"If you look at the commercial logic then this is a good scheme. But how can you guarantee jobs before joining a course? Several factors play a role in getting a job and not just the reputation of the institution," said Mahavir Jain, a student at Delhi University.

The quality of universities and colleges in India also poses a problem.

"There are engineering colleges of differing quality in this country. How do you judge which is good and which is bad? Moreover, several students get jobs because there is a demand in the industry, like IT and telecom, and teaching," said Ruchira Mishra, a first year student at Jawaharlal Nehru University in New Delhi.

Mishra also said education loans should not be so strictly linked to employability. "Does this mean that only those students who want lucrative careers have a right to access loans? What about humanities, or fashion design or the arts?"

As the number of students entering higher education in India increases, so will the challenges of financing students.

Recognising that not all students get remunerative jobs after completing higher education and also to prevent slippages, the IBA's new educational loan scheme has extended the repayment period to 10 years for loans up to Rs750,000 and 15 years for loans above that. Under the earlier model scheme, loans had to be fully repaid within five to seven years after commencement of repayment.

The IBA says it will attempt to track students' progress.

Government's role in financing students

As more students in India access higher education, both in domestic and international institutions, the demand for educational loans has risen rapidly, said Nupur Mitra, executive director of the Indian Overseas Bank in Chennai. Another reason was the lack of collateral required for loans of up to Rs400,000, which made it easy to obtain funding.

Loans between Rs400,000 and Rs750,000 require a third-party guarantor, and credit above Rs750,000 needs to be backed by tangible collateral security such as property (preferably houses), government securities, gold, shares or a third party with assets matching the loan amount.

The government launched a scheme in 2010 providing interest-free educational loans to students from families earning less than Rs450,000 a year. The interest subsidy is valid for the length of the course and there is a moratorium of six months or a year after employment.

While this has helped poor students obtain loans, only 40% of the budgeted Rs5 billion was used in 2011, in part because few among the target group were aware of its existence.

Experts believe there should be options other than loans available to students.

"Fee increases along with scholarships used to be the recommendation for a long period. It is being rapidly replaced nowadays with 'fee increases with loans'," said Professor JBG Tilak, head of the department of educational finance at the National University of Educational Planning and Administration in New Delhi.

"Policy-makers seem to be strongly favouring loans [rather than] scholarships. That is a problematic measure and can affect equity."