1

Fostering Human Capital for a $20 Trillion India:What Can and Should Banks Do?

M R Das1

Contextualization

The art of economy building is changing. Finance is no longer the ‘engine’ of

growth; instead high-end human capital has emerged as the driver of ‘finance’

by facilitating its optimal use. In a knowledge-intensive milieu, countries with

comfortable capital cannot make desired macro- or micro-economic headway

unless complemented with appropriate human talent and skill (e.g., Middle

East). In advanced economies, the economic growth frontier has been shaped

equally by both physical and human capital.

Fundamentally, building high-end human capital necessitates a robust system

for higher education and skill development without which the likely benefits of

‘demographic dividend’ will be elusive. Therefore, we perceive that in order to

build a $20 trillion economy – sustainably and equitably - what India needs the

most is enrichment of its human capital, which is still grossly inadequate.

In this paper, we envision how banks, traditionally hailed as “agents of

change”, can be inspired to become a pivot for building and enriching high-

end human capital to sustain a $20 trillion economy.

Against the above-mentioned backdrop, the paper is structured as follows:

Section I addresses the fundamental issue of why should banks be drawn into

the education sector when the State is mandated to develop it? Section 2

dwells upon the role of banks in providing higher education loans; Section 3

focuses on cross-country experiences to draw lessons for India; Section 4

enunciates some practical policies to augment banks’ role in fortifying skill and

talent; and Section 5 concludes.

Besides own experience in two big banks as Senior Economist for over 3

decades, the paper basically builds on secondary data from publicly available

authentic sources.

1 Independent Researcher. Earlier, Senior Economist for 31 years in SBI and PNB.

2

Section I. Why Banks: A Supply-Demand Analysis

Higher education in this paper is meant to encompass education from college

level and beyond including general, professional and technical education.

Higher education effects metabolic transformation, in a positive way, in one’s

perceptions about changes occurring around her/him. S/he starts viewing

things analytically, weighing both ‘pros’ and ‘cons’. Further, it imparts skill,

which coupled with analytical capability, makes her/him more employable in

all-inclusive way not only for her/his own benefit but also the society’s benefit.

Higher education is the joint responsibility of both the Centre and States.

According to the Ministry of Human Resource Development, the number of

universities, institutions of national importance and the like increased from 20

in 1950 to 712 in 2014, with the State government universities dominating.

The number of colleges increased from 500 to 36,671 over the same period.

We evaluate the current status of our higher education from 4 angles: (a)

Demand, (b) Availability and regional balance, (c) Quality and (d) Cost.

Demand

Demand for higher education is increasing phenomenally. Besides, there is

noticeable structural change in demand. A variety of factors including

demographic, economic, technological, social and psychological has

contributed to this.

Increased per capita income, coupled with smaller family size, has enabled

parents to afford better and higher education for their children.

Today, employers prefer potential employees with many more qualifications or

specialized skills like MBA, specialization in financial management, computer

literacy, etc. Therefore, the students have to go for these higher courses.

Today, the public sector jobs are limited. The private sector, comprising

several MNCs, looks for varied qualifications, skills and talent in a person.

Hence, one has to invest in enhancing capabilities in order to begin a good

professional career. Further, career conscious employees have to pursue

advanced courses while working.

3

The youth psychology has transformed. They want to earn as much as

possible within the shortest possible time to attain a good standard of living

and recognition in the society because job span in the private sector is

uncertain.

There have been structural changes in the Indian economy with the service

sector coming to the forefront, aided by technology. Many new lines of

activities like media, IT, banking and finance, and real estate have emerged

which require skill and analytical expertise and the employers prefer those

with prior exposure.

Another noteworthy trend is that increasing number of students want to go

abroad for higher studies because they do not find education qualitatively

good here. Besides, as per a recent British Council study2, in India, a foreign

degree enhances one’s employability. In 2012, there were 1,89,472 Indians

studying abroad for higher education constituting 5.5% of the world total, with

outbound mobility ratio at 0.7 (UNESCO Institute for Statistics) and registering

a CAGR of 10% during 1999-2012. (Chart 1 illustrates the trend). Further,

2002 onwards, India steadily occupies the second position next to China.

1999

00 01 02 03 04 05 06 07 08 09 10 11 12 -

50,000

100,000

150,000

200,000

250,000

0%1%2%3%4%5%6%7%8%

Chart 1: Indian Students Abroad

Number (Primary Axis)Ratio to World (Secondary Axis)

Source: http://www.uis.unesco.org/

Availability and Disparity

As at end-March 2013, on an average, 1 university served 2,11,210 in the

age-group of 18-23 with wide regional variations (Range: 5,30,877 - 13,362 ).

Nearly three-fourth of the universities were in 13/30 States - 11 belonging to 3

2 The India Employability Survey, 2014.

4

regions, namely, North, South and West. A similar pattern is obtained for

colleges.

The Central, Eastern and North-Eastern regions are much deprived.

Therefore, students from these regions migrate to universities/colleges

outside their home States adding to their cost of education, besides

precipitating ‘brain drain’ from these areas.

As Economic Survey (2014-15) candidly observes “…institutions of higher

education are notoriously inadequate” (Volume I, pp.5).

Quality

Domestic ranking of universities and colleges by National Assessment and

Accreditation Council reveals that out of 179/630 universities accredited, 70

belong to ‘A’ Grade, 103 to ‘B’ and 6 to ‘C’. The corresponding grades for

5,224/33,000 colleges accredited are 554 - ‘A’, 3,697 - ‘B’ and 973 - ‘C’.

Insofar as global ranking is concerned, the scores of Indian universities are

pathetic. According to Times Higher Education magazine’s World University

Rankings 2014-15, India has only 4 universities/institutes in top 400, whereas

China has 11. In its BRICS & Emerging Economies Rankings 2015 Top 100,

India has 11 universities as against China (27) and Taiwan (19). In its Asia

University Rankings 2014 Top 100, as against 20, 18 and 14 universities from

Japan, China and Republic of Korea respectively, only 10 universities from

India find mention. A UNESCO report covering 11 Asian countries paints a

similar picture.3

As percentage of GDP, India’s R&D expenditure at 0.81 (2011) is woefully low

compared to many Emerging Market and Developing Countries (EMDCs),

e.g., Brazil (1.21), China (1.84), Hungary (1.22), Israel (3.97), Republic of

Korea (4.04), Russian Federation (1.09) and Turkey (0.86).

3 Higher Education in Asia: Expanding Out, Expanding Up (2014).

5

Affordability

Government Expenditure

Higher the government expenditure (Centre + States) on education, lower

should be the burden on students. In India, the government expenditure on

the entire education sector remains low. Between 2003-04 and 2012-13, total

expenditure on education by Education & Other Departments (Centre +

States) as proportion of GDP hovered around 3.3-4.3%, with most of the

times remaining below 4%. And, on higher education it was further low in the

range of 0.67 to 0.89% between 2005-06 and 2012-13. Charts 2 and 3

illustrate these trends.

03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 RE

12-13 BE

- 500

1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

0.00.51.01.52.02.53.03.54.04.55.0

Chart 2: Total Government Expenditure on Education

Expenditure (Rs. bn) (Primary Axis)% to GDP (Secondary Axis)

Source: http://mhrd.gov.in/higher_education

05-06 06-07 07-08 08-09 10-11 11-12 RE 12-13 BE0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Chart 3: Total Government Expenditure on Higher Education

Expenditure (Rs. bn) (Primary Axis) % to GDP (Secondary Axis)

Source: ibid.

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We also compared India with a select 15 of EMDCs in respect of 4

parameters and the results are summarized in Table 1.

Table 1: Government Expenditure on Education:International Comparison

 Parameters Position from Top Value

1. Government Expenditure as % of GDP 10 3.8

2. Government Expenditure as % of Total Expenditure

9 12.9

3. Expenditure on Tertiary Education as % of Government Expenditure on Education

2 33.2

4. Per Tertiary Student (Constant USD) 14 828.3Source: http://www.uis.unesco.org/

Except in respect of the No.3 parameter, in all others, India’s rank was far

from satisfactory.

The role of the private sector in the form of own set-ups and/or collaborations

with the governments is minimal. In addition, private institutions charge

exorbitant rates and on various inexplicable heads. Incidence of fraudulent

institutions in the private sector is not uncommon and teaching standards are

many a time below par.

Inflation

Even when judged against the limited way ‘Education’ is factored in into

Consumer Price Index and/or Consumer Price Index for Industrial Workers,

Education inflation has several times surpassed General inflation. Moreover,

Education inflation is more downwardly sticky than General inflation. Thirdly,

Education inflation pervades even the lower tier places, besides metros.

Section 2: Education Loans by Commercial Banks – An In-depth Analysis

The origin of Education Loan (hereafter EL) scheme in India by banks can be

traced back to the pre-Nationalization period. Education as a significant

contributor to nation building was weaved into the measures for social control

over banks, which were initiated by the Government of India in 1967-68 and

became formally effective in February 1969. As at June-end 1969, there were

1,477 EL accounts with Rs.4.6 million outstanding.

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The scheme thenceforth has evolved through contributions from the Ministries

of Human Resource Development and Finance, RBI, Indian Banks’

Association (IBA) and banks. IBA’s original Model Educational Loan Scheme

of 2001 has been revised over time and the latest improvements date back to

September 2012.

Brief Literature Review

As far as research-oriented studies on EL by banks is concerned, it is virtually

a virgin area. Most of the studies relate to government loans. Some of these

studies did not even favour commercial bank loans for higher education on

many grounds.4 It could be because commercial banks entered into the field

of financing education, in an effective way, rather late and the penetration has

not hitherto been adequately wide and deep. There are a few area-specific

sample studies which look into the socio-economic facets of the student-

borrowers,5 rather than how banks can use the EL route to help build high-end

human resources. Further, no study is yet available, in the public domain, on

the Non-performing Assets (NPA) issue in EL. This study is an attempt to

bridge these gaps.

EL provides financial support to meritorious students who want to pursue

higher education in India and abroad. Besides the basic Scheme, EL is also

4 Narayana, M.R. (2005): Student Loans by Commercial Banks-A Way to Reduce State Government Financial support to Higher Education, Journal of Developing Areas, 38(2), Spring.Robbins Committee (1963): Report of the Committee on Higher Education, London: HMSOTilak, J.B.G (1992): Student Loans in Financing Higher Education in India, Higher Education, 23(4) (June).----- (1999): Student Loans as the Answer to lack of Resources for Higher Education, Economic and Political Weekly, 34(1-2) (January 2-15):19.----- (2003): Higher Education and Development in Asia, Journal of Educational Planning and Administration, 17(2) (April).----- (2007): Student loans and Financing of Higher Education in India, Journal of Educational Planning and Administration, 21(3) (July).

5 Debi, Sailabala (2014): Loan Financing to Higher Education - Experiences of Bank Financing in a Less Developed Region, Journal of Educational Planning and Administration, Volume XXVIII, No. 1, January 2014.Panigrahi, Junisha (2010): Determinants of Educational Loan by Commercial Banks in India: Evidence and Implications based on a Sample Survey, Journal of Educational Planning and Administration, 24(4), (October).

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available for niche segments such as vocational, skill development, training,

etc., courses.

Analysis

The analysis has been carried out at 2 levels: (a) for all EL and (b) for those

EL included in Priority Sector Loans (PSL).

All EL

Data in respect of all EL, available for the period March-end 2005 to February-

end 2015, were sourced from RBI Data Warehouse. Table 2 presents the

amount outstanding in respect of EL, Non-food Loans (NFL) and Personal

Loan (PL), of which EL is a constituent.

Table 2: EL, NFL and PL – Amount Outstanding and CAGRs(Rs. billion)

March-end EL NFL PL2005 57 10,048 2,563 2006 100 14,048 3,602 2007 152 18,012 4,528 2008 205 22,048 5,218 2009 286 26,018 5,625 2010 369 30,400 5,856 2011 430 36,871 6,997 2012 499 42,897 7,828 2013 550 48,696 8,988 2014 600 55,660 10,386 CAGR 29.9% 20.9% 16.8%

Source: http://dbie.rbi.org.in/

All the three types of loans grew at rapid rates. EL registered the highest

CAGR. As at end-February 2015 (latest data available), EL stood at Rs.635

billion, up by 5.5% over the level at end-February 2014.

Chart 4 illustrates the movement of EL as proportion of NFL and PL over time.

9

0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3 1 4 1 5 *

0.6% 0.7% 0.8% 0.9% 1.1% 1.2% 1.2% 1.2% 1.1% 1.1% 1.1%

2.2%2.8%

3.4%3.9%

5.1%

6.3% 6.1% 6.4% 6.1%5.8%

5.4%

C ha r t 4 : Educ a t ion Loa n a s pr opr t ion of N on- food a nd Pe r s ona l Loa n

EL/NFL EL/PL

*Up to February. Source: ibid.

EL/PL ratio rose almost steadily from 2.2% in 2005 to a peak of 6.4% in 2012,

i.e., it multiplied almost 3 times, but it fell by 3 percentage points each in the

next 2 years. In 2014-15 (up to February), the fall accelerated.

EL/NFL ratio rose rather tardily, doubling in 2010 over that in 2005 and

staying at that level for next 2 years. Thereafter it declined to 1.1% and

remained at that level up to February 2015.

Chart 5 presents the incremental ratios over time.

06 07 08 09 10 11 12 13 141.1% 1.3% 1.3% 2.0% 1.9% 1.0% 1.1% 0.9% 0.7%4.1% 5.7%

7.7%

19.8%

35.8%

5.4%8.3%

4.3% 3.6%

Chart 5: Incremental Ratios

EL/NFL EL/PL

Source: ibid. Computation ours.

The ratio of year-on-year increase in EL to that in PL rose at a fast rate initially

and reached a peak of almost 36% in 2010, reflecting initial ‘irrational

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exuberance’, but thereafter it crashed. Similarly, the ratio of yearly incremental

EL to NFL increased initially, though not as rapidly as the corresponding

EL/PL ratio, but remained subdued and fell below 1% 2013 onwards.

In a word, EL/NFL and EL/PL ratios have been, by and large, on a downhill

since 2011. The major reason is banks’ reluctance to lend for Education,

since repayment faltered.

At March-end 2013, EL penetration and density ratios6 were estimated to be

1.9% and Rs.3,916 respectively which were very low.

EL in PSL

As already stated, EL has been included under PSL since 1969. Following the

recommendations of an RBI Internal Working Group on Priority Sector

Lending [Chairman: C S Murthy (2007)], EL to individuals, including vocational

courses up to Rs.1 million for studies in India and Rs.2 million for studies

abroad, came to be included under PSL from 2008 onwards.

Charts 6 to 11 present a vivid analysis of EL vis-à-vis PSL in respect of Public

Sector Banks (PSBs).

6 Penetration Ratio is defined as number of EL accounts as % of people in the 18-23 age-group and Density Ratio as amount of EL per person in the 18-23 age-group.

11

PSBs: EL

1969 1974 1979 1984 19880

10

20

30

40

50

60

70

80

0.00

0.10

0.20

0.30

0.40

0.50

0.60

Chart 6: 1969 to 1988 (June-end)

No. of Accounts (000) (Left Axis)Amount (Rs. billion) (Right Axis)

1990 1995 2000 2005 2010 2012 2013 20140

500

1000

1500

2000

2500

3000

0

100

200

300

400

500

600

Chart 7: 1990 to 2014 (March-end)

No. of Accounts (000) (Left Axis)Amount (Rs. billion) (Right Axis)

PSBs: Share of EL in PSL

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

Chart 8: 1969 to 1988

Account Amount

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%

Chart 9: 1990 to 2014

Account Amount

PSBs: EL: Average per Account (Rs.)

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

8,0

00

4,1

20

5,2

11

4,0

00

3,1

68

2,9

83

3,1

29

2,4

68

2,3

95

2,1

63

2,1

91

2,5

00

2,7

50

3,2

56

3,6

96

4,5

83

4,4

83

5,3

45

5,5

88 6,8

06

Chart 10: 1969 to 1988

90 92 94 96 982000 02 04 06 08 10 12 14

9,3

06

11,

000

15,

362

17,

727

20,

000

22,

571

24,

730

24,

561

40,

122

32,

847

67,

875

91,

786

97,

261

120

,084

1

20,4

32

136

,128

1

68,5

49

139

,840

1

62,5

35

172

,207

1

87,6

24

186

,979

1

96,9

11

205

,709

2

15,5

32

Chart 11: 1990 To 2014

Source: http://www.indiabudget.nic.in/ and http://dbie.rbi.org.in/

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Number of accounts and amount outstanding: During 1969-88, both the

number of accounts and amount increased sharply from 1979 onwards. For

the entire period, CAGRs were 25.2% and 24.2% in terms of number of

accounts and amount respectively. During 1990-2014, both rose sharply from

2005 onwards. Over the entire period, CAGRs were 16% (number of

accounts) and 32.3% (amount).

Share in PSL: During 1969-88, the share of EL, both in terms of number of

accounts and amount, fell sharply from June 1972 onwards from their peaks

in the previous year and remained below the peaks thereafter. During 1990-

2014, both number of accounts and amount increased from the outset, but

sharply from March 2002 onwards. Both remained much above 4% from

March 2010 onwards. However, 2013 onwards, deceleration in both set in

with the EL/PSL ratio in terms of amount plunging below 4%.

Per Account Loan: During 1969-88, average amount of loan per account

initially fell up to 1978 but thereafter increased almost steadily. During 1990-

2014, the average showed a consistently upward movement right from 1990

onwards.

Bank Group-wise Analysis

Chart 12 presents the shares of State Bank Group (SBG), Nationalized Banks

(NBs) and Private Banks (PVTBs) in terms of number of accounts and amount

as obtained at March-end 2014.

29.8%

65.4%

4.8% 32.2%

64.2%

3.6%

Chart 12: Bank Group-wise Share In EL

SBG (6) NBs (20)PVTBs (19)

Inner/Outer circle: Number of Accounts/Amount. Source: ibid.

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The participation of private banks was minimal, whereas the performance of

SBG was laudable.

Bank-wise Analysis

Chart 13 presents the bank-wise share in amount as at end-March 2014.

24.2%

8.5%

6.6%

6.4%5.9%5.6%

4.7%4.7%

4.5%

3.7%

25.1%

Chart 13: Bank-wise Share in Amount

SBI Canara PNB IOB IndianCentral Syndicate BoI SBT UnionRest 16 PSBs

Source: ibid. Computation ours.

SBI was the market leader with almost a quarter share in the total. While 9

other banks, combined together, had over a half, rest 16 banks had to share

another quarter. Thus, there were many PSBs which were nearly dormant.

We found a negative correlation, though weak, between the absolute amount

outstanding and the amount per account. This meant that there were many

banks with a few accounts but with larger amount per account, indicating

credit concentration which goes against the sound principles of credit

management.

Incidence of EL in Non-PSL

As mentioned earlier, loans up to Rs.2 million are included under PSL. We

estimated the amount outstanding against EL outside PSL, i.e. above Rs.2

million. As at March-end 2008, amount outstanding against such accounts

was Rs.194 billion which steadily increased to Rs.579 billion at March-end

2014. However, as proportion of total EL amount outstanding, it generally

declined from 5.3% to 3.5% over the same period.

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15

Loan Delinquency

The last 3 to 4 years have witnessed a lot of noise about the so-called high

NPA level in EL. However, there are no data available in the public domain,

even at a very broad level, let alone precise. Aggregate data can be

misleading, as it would be difficult to ascertain (a) ‘actual’ and ‘technical’7 NPA

and (b) incidence of NPA region/State-wise, bank-group/bank-wise, loan

limit/social category/gender-wise, etc. Problem assessment will be arduous

without these kinds of data. Unavailability of EL NPA data in the public

domain is corroborated by Kaveri8 who, based on newspaper reports and

informal sources, had put the EL NPA at 6% for 2011-12. Our informal enquiry

with 7 PSBs revealed that the EL NPA ratio varied between 0.25% and 12%.

The hullabaloo as to EL NPA had led Pranab Mukherjee, the then Finance

Minister, to introduce in the Budget (2009-10) the Central Scheme for Interest

Subsidy for ELs disbursed after 1.4.2009. The scheme was extended in 2014

by P. Chidambaram, the then Finance Minister, in his Interim Budget.

But the question remains why is this opacity as to the database pertaining to

EL NPA, especially when it is being said to be high?

In the absence of data, we have taken NPA for PL, of which EL is a

constituent, as a ‘crude’ proxy. Our logic is: if EL NPA is high, then it will

greatly influence the overall level of sectoral NPA. Table 3 presents the

distribution of 26 PSBs according to PL NPA.

7 ‘Technical’ NPA arises out of non-feeding of proper repayment schedule into the Core Banking Solution of banks.8 Kaveri, V S (2012): NPAs in Education Loan – An Overview, The Indian Banker, Volume VII, No.9, September 2012.

16

Table 3: PL NPAs –Distribution of PSBs

NPA Ratio (%) No. < 1 2> 1 < 2 8> 2 < 3 6> 3 < 4 2> 4 < 5 1> 5 < 6 3> 6 < 7 2> 7 < 9 1> 15 1Total 26

Source: Bank Annual Reports.

In 16 banks, the ratio remained below 3%. Moreover, the ratios were

generally far below those for agriculture, industries and services sectors.

It could be that the banks which had lent to less number of borrowers had

larger incidence of NPA. To test this we calculated the rank correlation

coefficient between (1) number of EL accounts under PSL and (2) NPA

percentage in PL in respect of 10 PSBs which had PL NPA at above 3%. The

correlation coefficient was -0.382. The ‘negative’ sign indicates that the 10

banks might have lent to relatively less number of borrowers and perhaps the

concentration risk did not pay off. The average number of EL accounts for the

10 banks was 71,306 compared to 1,15,190 for the 16 banks.

How severe is EL NPA?

First, it may be recalled that the share of EL in NFL and PL varied in the range

of 0.6 to 1.2% and 2.2 to 6.4% respectively over the period 2006 to 2015 (up

to February). The values of incremental ratios indicated that those were under

leash too. Furthermore, as at March-end 2014, the share of EL in PSL was

3.4% in terms of amount. We reckon that these shares are too low to engineer

any deleterious impact.

Second, let us carry out a simple stress test by hypothetically assuming that

as high as one-fifth of the EL amount outstanding as at March-end 2014, i.e.,

Rs.120 billion turn into NPA. If so,

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i. It will erode 2.55% of the Net Owned Funds of the public and private

sector banks.

ii. It will be below 5% of total NPA of PSBs

iii. It will be 29% less than the amount blocked in top 30 suit-field accounts

iv. It will be 58% below the total NPA concentrated in top 4 borrowers of

PSBs

v. One-fifth of the incremental amount in EL portfolio in 2013-14, i.e.,

Rs.10 billion constitutes only 1.4% of net profit of the public and private

sector banks

Therefore, we conclude that NPA in the EL portfolio is too small to make any

wild splash!

Some bankers argue that since the employment situation has been bleak for

last 4 to 5 years, why should banks lend to students? Extrapolated, this would

mean why should we educate our children after all, if jobs are not available?

The solution lies in creating jobs, not in stopping them from acquiring higher

education. Secondly, tomorrow when the economy picks up consequent upon

cyclical upturn and if our human resources are not equipped to take on the

revival, are we going to import talent and skill from abroad like many Middle

East and African countries do? Therefore, creating industrial/services capacity

and bolstering skill and talent should go simultaneously.

The overall fear psychosis against NPA that has gripped bankers has its

origin elsewhere and relate to some time for which students are in no way

responsible. Therefore, this psychosis should not be allowed to cast its long

shadow on the future of the young ones who are expected to lead the country

tomorrow.

In a word, EL NPA is not as serious as it is made out to be. Even if banks

deem it serious, it is well within their powers and means to control it, instead

of curtailing the availability of EL.

Section 3: Country Experiences

Bank loan is fast emerging as a significant route for students to finance their

higher education. Banks all over the world have also responded equally well

to this demand. Today, in over 80 countries, commercial banks provide loans

18

to students for higher education. Notable examples include China (State

commercial banks), Korea (the Ministry of Education Scheme), Canada (until

2000), and the US. In Canada, for 3 decades from mid-1960s to mid-1990s

commercial banks were responsible for student loan financing, disbursement

and recovery. But the 100% repayment default guarantee made banks lazy to

recover the loans and default rates increased phenomenally. Subsequently, in

the latter half of 1990s, banks assumed the default risk but were

compensated by a 5% risk premium. However, banks wanted the

compensation to go beyond 10% and thus, the scheme was considered as

unsustainable. In 2000, the government assumed the responsibility for loan

scheme funding.

According to a Pew Research Centre report (October 2014), in the US: (a)

student indebtedness recently rose, especially from the relatively upper-

middle income group families; (b) more of graduates are borrowing; (c)

students whose parents are more educated are borrowing more; (d) loan

delinquency has increased; (e) increased student indebtedness has adversely

affected the credit profile of graduates in the beginning of their professional

career; and (f) female-borrowers are increasing. In addition, several proposals

are afloat to relieve the educational debt burden which include student debt

forgiveness (a euphemism for waiver) to varying extent.

Section 4: Policy Issues

While enunciating the undernoted policies, we have tried to balance student-

borrower friendliness and bank profitability.

First, the imperatives should be crystal clear before the policy makers and

executors. The imperatives are:

1. The economy should achieve 8-10% growth consistently

2. Gross Enrolment Ratio in higher education should increase to 30% by

2020

3. The country needs a gargantuan talent and skill base in almost all

fields

4. Available public finance is too meagre to develop the required skill and

talent base, adequately and appropriately

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5. Therefore, obviously, the private sector has to be roped in

6. Except a very few, the private non-financial sector is not coming

forward – either commercially or philanthropically

7. Hence the financial institutions’ support, especially PSBs

The academia is divided over whether higher expenditure in education leads

to higher economic growth. However, intuitively, we believe that there exists a

positive correlation between the two.

Our policy analysis is carried under the following heads:

Waiver

We fully agree with the RBI Governor that ‘waiver’ or ‘interest subvention’

should never be resorted to loans for any purpose. Waivers have serious

distributional effects as these discriminate, particularly when constricted by

income criterion, and it also goes against the basic tenets of sound lending. It

pollutes the entire credit culture. For example, in the farm sector, instead of

frittering away time, energy and resources on waivers if proper schemes of

agricultural insurance or weather-resistant crops or irrigation were

implemented, it would have been far more fructuous. Farmers needed to be

psychologically empowered to take on risks, and this could have been

possible by armoring them with risk-mitigating weapons. If banks expose the

student-borrowers to ‘waiver’ or ‘interest subvention’ at the outset of their

career, they may expect more of it in future for all their loans and become

rogue debtors. Or, maybe her/his friends/relatives would take loans expecting

waiver/subvention.

Interest Rate – The Key

There could be just one solution to the EL NPA imbroglio, if banks feel it to be

so. Banks should provide the basic EL at Base Rate. This will make loans

cheaper and evoke voluntary, smooth and better repayment by the student-

borrowers. In fact, banks are blocking the transmission of RBI monetary policy

measures due to their own problems precipitated by several factors which are

exogenous to students. Therefore, it would be illogical to ask the meritorious

students to bear the brunt of this. Banks should treat EL as a low-margin,

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high-volume business. Once the rate of interest is reduced, there is no need

to classify EL under PSL. Banks are ‘special’, so should be the student loans.

Hiking Loan Limits

The student loan limits should be revised every three years. The Central

Statistics Office should design an exclusive, realistic price index for the

Education sector. The revisions in loan limits should be linked to the

movements in the proposed index.

Repayment

Banks may think of exploring alternative repayment mechanisms which can

be easier and beneficial to both the student-borrowers and bank. Income-

contingent repayment is gaining currency in many developed countries. The

mortgage-type repayment mechanism being followed today with fixed

repayment instalments, decided ex ante irrespective of the earnings of the

student after studies, proves onerous, as students generally earn less initially.

In other words, mortgage-type repayment is income-invariant. As against this,

income-contingent repayment plans involve repayment in terms of a fixed

percentage of the salary earned by the student-borrower. It is like dividend

earned by a shareholder. As the earnings of the student-borrower increase

over time, banks can get increasing amount as their repayment instalments.

The former can also easily afford this. Moreover, it is fixed ex post. The bank

and the student-borrower can alter the percentage on mutual understanding.

This needs deeper research.

Banks may explore possibilities of collecting repayment amount through

Income Tax Department or universities.

Monitoring Essential

Monitoring student-borrowers is difficult, since they go to different places for

employment. It has been demonstrated that maintaining close relationship

with borrowers can lead to better recovery of bank loans.9 Therefore, to

9 Rajan, R.G., Zingales, L. (1999). “Which capitalism? Lessons from the East Asian Crisis”. Journal of Applied Corporate Finance 11, 40–48, as referred by Ross Levine in “Finance and Growth: Theory And Evidence” (Chapter 12)

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ameliorate this risk, banks have to beef up their monitoring and follow-up

mechanism. Since physical monitoring of a large number of student-borrowers

is time-consuming and costly, technology and social media can be extensively

harnessed to keep track of them. Today, in Facebook, for example, people

can track even their long-lost friends. Banks can also equally do that.

However, banks must desist from ‘naming and shaming’ the defaulting

student-borrowers in public or else, the ensuing collateral socio-economic

damage will outstrip the damage due to NPA.

Credit GuaranteeThe National Credit Guarantee Trustee Company aimed at providing

guarantee cover to banks for EL is being set up, which may become a source

of comfort for banks. However, the guarantee scheme should promote a

healthy credit culture, not make the system lackadaisical as was observed in

Canada. Moreover, the guarantee fee should not be too high for banks to

desert the scheme as happened with the small loans credit guarantee

schemes earlier administered by DICGC.

Look beyond Loans

Banks should look at the student-borrower as a potential business source in

future. Banks should not be myopic by burying in oblivion the student-

borrower after the loan disbursement. Instead, if a consistent relationship is

nurtured with a student-borrower, s/he can bring in several business

opportunities in the form of subscribing to both liability and asset side

products of the bank as well as services. Today’s young workers need loans

for buying house, vehicle and durables, and children’s education. Banks can

cross-sell their insurance (already there is an option for taking insurance

policy while availing of EL) and capital market related products. Banks can

also help the student-borrower in money transfer or remittances and earn

fees, both during the studentship as well as afterwards. Indians generally do

not forget their roots. India is the topmost destination in the world for overseas

inward remittance.10 In fact, some of the private banks have tie-ups with

coaching-cum-counselling centres for students aspiring to go abroad for

higher studies and these banks provide remittance and foreign exchange

10 World Bank database (2014)

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services to the selected students from the coaching centres at concessional

rates. Internal remittance is equally high.

In a word, banks should perceive the student-borrower not only as their

present customer but as their future business partner too. That will be a more

comprehensive way of looking at student loans.

Increasing Bank Participation

Private sector banks should participate wholeheartedly. Bharatiya Mahila

Bank, the exclusive bank for women, should take the responsibility of EL for

women. Many female-borrowers drop out from college/university after

marriage. In such situations, women-lenders can motivate their borrower

counterparts better than men.

Data Availability

A sound database needs to be created on various micro-level attributes of EL.

CSR Support

Commercial involvement of banks in developing high-end HR via EL should

be buttressed by their CSR activities. CSR is important for any corporate,

particularly banks which are “agents” of socio-economic change. Every bank

earmarks a certain percentage of its yearly profit towards undertaking CSR

activities. It is fine that banks donate ambulances, water coolers, fans, etc.,

but they can also support R&D through CSR. For example, banks can institute

endowment chairs in important universities/institutions.

Universities/institutions in several advanced countries are replete with such

chairs sponsored by commercial entities. They can also sponsor projects for

mutual benefits. Banking as a discipline in India is research-starved. Banks

can take initiatives to mitigate this. If private corporates can establish

universities, why can’t banks? Like village adoption, individual banks can even

adopt a university/institution. Banks themselves can benefit from such

sponsorship when it comes to recruitment. This will help banks accomplish

their CSR objectives too. Banks may sponsor national and international

seminars, conferences, etc., which will enhance their image too.

Section 5: Concluding Remarks

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Banks can and should play a highly significant role, in various direct and

indirect ways, to foster human resources in an aggressive manner in all

categories of population and income groups. Thus, EL should not be looked

upon as a ‘commercial’ venture alone; it should be treated as serving a ‘noble

cause’. Intrinsically, it would be wrong to equate or club EL with other PLs like

home, vehicle and consumer durables loans, as their objectives and

customers are poles apart. A committee of bankers and researchers should

make a comprehensive study and bring in further modifications in banks’

engagement in harnessing the country’s human talent, keeping the ultimate

goal of building a strong economy, sustainably and equitably, in view.