Taking the HRD Minister, Kapil Sibal’s vision forward of revolutionizing the education system (primarily school level), in India, Finance Minister, Pranab Mukherjee has laid emphasis on the cause of higher education. FM has announced an increase of Rs. 2000 crore in plan expenditure to Rs. 9,596 crore besides other sops especially for students from weaker section of the society. But is this really going to help? Will it really make an impact on the future of students yearning for higher education? Or is it that government continues to pay lip service to the cause of making higher education more accessible to Indian citizens through easier availability of education loans? Or is it a public relations exercise, which may not have any significant effect on improving access to higher education.

Let’s analyze what students have in store for them:

The government clearly knows that in education loans it is not the cost of the loans but availability of such loans without requirement of any collateral or a high-income guarantor that is holding back the access. World over this gap is filled by the governments funding or guaranteeing loans that are normally given by commercial lenders. The FFSAP (Federally Funded Student Aid Program) of the US government for example ensures that every student who gets admission in any recognized course is able to get a loan though it is not necessarily cheap. But most borrowers do not mind paying commercial rates of interest as long as they do not have to pay anything during the course period and repayment begins after the course is over. Since government does not want to commit the kind of funds that such a program will require, it has come up with this idea of subsidizing the entire interest cost during the course period for students from the economically weaker sections. This is of course helpful for the handful of economically weaker section students who manage to get these loans from banks, as it will reduce their liability when they actually start paying the loan back after the course is complete. It will unfortunately be of no assistance to the vast multitude of poor students who are unable to get the loan in the first place. The finance minister in his speech has indicated that about 5 lakh students will benefit from this scheme. The number of economically weaker students who are able/eligible to get an education loan from banks is unlikely to be anywhere remotely near this figure. Clearly the government needs to commit substantial funds to make higher education accessible to the “aam aadmi”.

On the tax deduction relating to interest paid on education loans the definition of the higher education has been changed to provide that the deduction will be allowed for interest paid on loan taken to pursue any course after SSC or equivalent. Currently only loans taken for full time graduate courses in engineering, medicine, management or postgraduate courses in applied sciences or pure sciences were eligible for this deduction. This is an excellent amendment as it substantially extends the scope of this deduction. Of course to be eligible for the deduction the loan needs to be taken only from a “bank”* or an “approved charitable institution”. The issue is that banks are willing to provide loans only for a limited number of courses. Therefore to encourage private sector players such as NBFCs to provide education loans the requirement that the loan be taken only from a bank* should also be extended to include NBFC’s or other bodies/individuals to make this deduction more meaningful.

* (Including Housing Development Finance Corporation Limited)

The New Pension Scheme:

Another attention grabbing scheme is recently launched National Pension Scheme (NPS) where some of the mist surrounding the tax treatment has now been cleared

Firstly, the Contributions to this scheme are now tax deductible within the overall limit of Rs. 1 lacs and can be made by both salaried as well as self-employed individuals. The income accrued to your account will also be exempt at the time it is earned. Any withdrawals are fully taxable unless used to buy an annuity policy in the same financial year. Any annuity received under the annuity policy is off course fully taxable. The good thing is that any dividend received by the fund will not be subject to any dividend distribution tax. Given that the yield on NIFTY is around 1.22% the waiver of the dividend distribution tax would mean an additional yield of 0.25% for the fund on its equity investments. This significantly enhances the return from the equity portion of the NPS. Also since NPS will now not be required to pay any STT on its market purchases of shares and securities it will result in enhanced yields for the subscriber.

But the NPS continues to suffer from the latecomer syndrome. Its problem is that it has been conceptualized and launched after the government has frozen on the Exempt/Exempt/Tax model of treatment of such schemes. This means that the contribution to the scheme is tax deductible, the accretion of income is exempt but is taxable when the money is withdrawn from the scheme. The existing schemes such as PPF and EPF are exempt at all stages, which means even withdrawals are not taxable. Similarly employers’ contribution upto Rs. 1,00,000 to an approved super annuation fund is exempt and the income accrued to the fund is also not taxable and at retirement time the withdrawal of upto 1/3^rd of the fund value is also exempt from tax.

Because of this tax disadvantage at the time of withdrawal and the lack of track record on returns it will be relatively difficult for the scheme to take off in any big way. Paradoxically it will be the well heeled savvy investors who might take to the NPS first since the tax advantage of PPF/EPF is available only upto a certain limit and post that the NPS scheme makes eminent sense.

Taxation Sops

The removal of surcharge benefits the people who have taxable income over Rs. 10 lacs. The minor enhancement in the minimum amount chargeable to tax is too insignificant to make any serious difference.

The biggest thing that will affect loan consumers is the potential for interest rates to rise given the size of the government’s borrowing program. This is likely to increase the attractiveness of the semi fixed rate loans that are being offered by a few PSU banks.

The other big things in the budget are still to be unveiled. The new tax code will be widely awaited and discussed. It is expected to remove most of the exemptions and deductions for businesses and to a lesser extent on personal incomes. The salaried class also waits with bated breath for the amendment in rules that will deal with perquisites in lieu of the removal of FBT. Hopefully the new promised “Saral 2″ will actually be Saral.

Clearly we will be seeing a lot of action outside this budget.
Watch this space for developing implications.

The education ministry headed by Mr. Kapil Sibal (actually the ministry is called Human Resources Development but the most important thing it looks after is education) is in the limelight following the realization that higher education and vocational training are the best poverty alleviation tools in the long run.

Lot has already been written about what needs to be done in the higher and vocational education sector. There are plenty of valid suggestions on how to energize this sector by increasing capacity, improving quality, making it more accessible and removing it from the clutches of the government bureaucracy and bringing in the private sector.

One important element of reform in this sector will necessarily be in the area of education loans. We have already seen the difference that easier availability of loans can make in the housing and consumer durables sector. Education can be another sector that can benefit tremendously by easier availability of education loans.

Today education loans in India lack any institutional backing and suffer from the disease of “good intentions”. Let me explain. At the best of times education loans are a risky business for the banks in any country. The typical higher education or vocation education student will take around 2-5 years to complete his education. He will need a fairly large loan to complete his education. Most likely he will not have any collateral security to offer for the education loan. In most cases his parents (or other close relatives) may be willing to stand guarantee for the due repayment of the loan but their own income may not be sufficient to repay the loan in case the student is unable to complete the course for any reason or is unable to find a job after he completes the course. In fact in a majority of cases the student’s family is not even in a position to pay the interest on the loan during the time when he is undergoing the course. They require that the interest amount also be accumulated and the repayment (of both principal and interest) begins only after the course is over and the student gets the job. So in summary the bank is expected to lend money to a borrower without any collateral security and without sufficient current income to pay back the loan solely on the hope that the student will acquire skills good enough to get a job that will pay him enough to enable him to pay back the loan. So left to themselves the banks are not going to disburse significant amount of education loans except to the well heeled who can provide collateral/guarantee.

In most countries government funded specialized institutions (such as the older version of Sallie Mae in the US or the FFSAP - Federally Funded Student Aid Program) step in to ensure that loans are available for all students who are good enough to get into any accredited educational institutions that provides higher or vocational education. The loans are not cheap but the important thing is that they are available in spite of the credit issues surrounding education loans. The institution normally does not lend directly but provides back to back refinance (provide loans to lenders to enable them to on-lend to students) and share in the risk (write off part of such loans if the student defaults and is unable to repay) to make sure that this vital tool to make higher education accessible to everybody (and not just the middle and rich classes as is the case in India). Contrast this with what happens in India. The total incremental education loan disbursements made by the entire banking sector for last year was around Rs. 8,500 crores which is quite negligible considering the bank’s total deposit base. Compare this with the estimated home loan disbursements in excess  of Rs. 1,00,000 crores for the same period and the contrast is very clear.

So what is the reason for this dismal state of affairs? It is the attitude of the government that “talk” can substitute for action. The finance minister had promised to set up an Education Re-finance Corporation from part of the “education cess” that all of us pay. That promise is languishing in the bureaucratic by lanes of Delhi for the last 3 years. Meanwhile the policy makers hope that good intentions and strong words will somehow produce results.

Education loans are a part of the priority sector but have no separate allocation. Also education loans cannot be priced higher than 1% above the particular bank’s PLR. Thus banks like to do the other kind of priority sector loans (loans to small transport operators, professionals etc.), which they consider less risky. In fact, the private sector banks and foreign banks who cannot be bullied by the government, have completely kept away from the sector (some of them have “education loan programs” but they all require collateral and/or guarantee from a well earning relative and interest servicing during the course period which effectively means that they service only the well heeled sections of the society). The public sector banks on the other hand are forced to show some disbursements under this head, do the minimum that they can get away with without offending the government. They naturally have restrictive rules on the type of courses as well requirement of collateral/income based guarantee for loans above Rs. 4 lacs. All this means that there will be restricted finance available for potential students even as the education sector itself is becoming diversified and more vibrant.

In the current budget announced on July 6, 2009 the finance minister, in a clever play of words, has promised to subsidise  the entire interest expenses incurred during the course period  of students from the economically weaker sections who somehow manage to get the loan sanctioned from banks. He has said that about 5 lac students are expected to benefit from this scheme. This looks more like a statement aimed at the galleries rather than actually getting some results on the ground. It is very doubtful that the PSU banks in India will give loans to so many students belonging to economically weaker section of society.

In fact if a poor student was bright enough to get admission in say “Harvard” but did not qualify for student aid from the university, perish the thought that a education loan will enable him to do the course. He will probably have to do the rounds of the charitable institutions for grants/aid or probably some politician will take up his cause after the story is played up in the media. If he is not willing to do that he will probably loose the chance of completely remaking his (and the country’s) future.

Finance Minister routinely exhort the public sector banks to lend more towards education loans. It is no surprise that public sector equally routinely ignore this exhortation after paying lip service to education loans by releasing a few prominent advertisements in the media.

Then hon’ble education minister must ensure that the government puts its money where its mouth is and creates the state funded institution that was promised long ago. After that more education loans will actually get disbursed .

To that day – Amen

It’s that time of the year again when wishes are horses (well almost). Imagination (and hope) runs high . Well here is my wishlist for Mr. Mukherjee.

http://www.apnaloan.com/prebudget-wishlist.html

I am a resident of Nanded,a small town in Maharashtra.
I obtained a MBA degree for the University here and then I applied for International Business with Bournemouth University,UK and received admission to the said course. The total fees for the course is 11,000 GBP. (it’s coming close to 8,20,000 INR)
Now, I approached my bank for an education loan as I could not afford the said fees. But it seems the bank manager is not interested in giving me a loan. I can understand that we can’t avail the loan facility if we don’t have a good academic background or if our financial position doesn’t seem to be OK.

But,once,not even once he bothered looking at my academic doc’s or my financial papers. I approached him four times. I said I am ready to offer a collateral worth 20 lakhs in the form of property papers,if he wants am ready to put Rs.4 lakhs as FD in the bank and provide the same as a security,can arrange guarantors other than my parents…
I secured more than 79% in my MBA exams,received graduation degree with First class…
But he didn’t seem to understand.

Please look at what he said “We don’t provide loans more than 4 lakh Rs.”,

“We provide loans to only those who have a joining letter from a company!”

“Why don’t You approach other banks-there are more than 15 banks in Nanded!” I said that I have an account with this bank only.

“Now-a-days students are coming back from Australia, why You want to go abroad for studies!…” I said that my destination for study abroad is UK and not Australia, but he rudely said “Jao Yaar,time waste mat karo”

I want to know from You Sir how can I persuade this manager to give me an education loan or what action can I take against him. Am I totally on his mercy? Till now, in all the 4 meetings, he has not even once questioned about my studies or looked at my bank account details. We are the bank’s customer for the last 3 years and the total transaction in the account is more than 30 lakhs…

Thank You for Your time.

Education loans as a sector is becoming increasingly popular, with lenders and borrowers. In fact, being a part of the priority lending, its also getting support through Reserve Bank of India’s (RBI) initiatives.

The RBI has taken measures to encourage the students to borrow and to facilitate the growth of the sector. The central bank cut down the risk weightage on education loans from 125 percent to 75 percent. This has been done to make it easier for potential loan applicants to get loans.

Also, since education loans above Rs. 4 lakh are backed by security, it is safe to assume that education loans will have a low ratio of non-performing assets.

Some media reports also spoke of a Higher Education Loan Guarantee Authority (HELGA). This proposed entity will aid needy students in getting easy loans. HELGA may also take care of the interest rate payments during the ‘moratorium period’ of the education loans.

The Finance Ministry is also promoting the sector. In media reports, the Finance ministry urged bankers to adopt a flexible approach to extending educational loans to students.

In another attempt to make things easier, the Indian Banks’ Association (IBA) set up a working group to study how education loans can become a lucrative business. The recommendations of the group were taken into account and the banks revised their norms.

The IBA also proposed the establishment of a Rs 2.5 billion Credit Guarantee Fund. The entity is to be formed on the lines of that of the Guarantee Trust Scheme for small-scale industries. The proposed fund will cushion loan defaults and will also serve as a group insurance product.

The IBA recommended that half of the corpus be funded by the Centre while the rest could be shared by the banks and the borrower. The student-borrower will pay a premium for the amount borrowed and the bank can claim the insurance, if the student defaults. The proposal is being considered by both the RBI and the Union Finance ministry.

At a ‘loan mela’ organised by Indian Overseas Bank (IOB) in September 2008, Finance Minister, Mr. P. Chidambaram said that banks should clear loan applications on a case by case basis. He was quoted in a media report in  saying, “Don’t follow strict rules. Bankers should apply the humanitarian angle while processing the loan applications.”

I had applied for an education loan from Allahabad Bank and the Konnagar branch behaved in a totally irresponsible manner. In fact, they took a U-turn on loan sanction right on the day of fee submission. I want to give a lesson to those who played with my career. What do I do?

This is with reference to an education loan taken from the Central Bank of India for pursuing MBA. The loan amount sanctioned by the bank was Rs. 90, 000 – Rs. 1, 00, 000 which did not cover the cost of then course completely. Unfortunately, I fell ill due to chicken pox and could not appear for my papers. I had to repeat the semester due to attendance issues and the fact that I could not appear for my exams. However, due to some personal problems, we could not pay the installment due to the bank. I have now completed my MBA. In the meantime, the Bank Manager has been sending us letters and notices for repayment of loan. I also came across some sort of legal notice sent to us to begin repayment.

I had taken up a job in a private bank and worked there for 6 months. Unfortunately, I had to leave it mid-way due to my dad’s illness. This is the reason why I still haven’t been able to start repaying my loan. In May 2008, I completed one year of completion of the course, from which the repayment was scheduled to begin. Is the bank authorised to send us letters and notices like the ones mentioned above before it is actually time for the repayment to begin?