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.

This is a strange notion for most of us who think of “trust” only in the context of institutions or people (banks and other companies) with whom you deposit your hard earned money. After all what do you care whether the bank from whom you borrow is trustworthy or not. After all it is they who have to recover money from you and it is they who should be worried whether you are trustworthy and not the other way around. I was very much a part of this school of thought till a few months ago. But some recent events that affected me personally have forced me to rethink.

Incident Number 1

I had signed as a guarantor for the education loan taken by my brother from a leading housing finance company (they also have a relatively lesser known education loan program) to fund his MBA program at the prestigious Indian School of Business (ISB), Hyderabad. This education loan did not require any repayment (either of interest or principal) during the first 15 months. Now comes the twist. Towards the end of his one year program my brother informed me of a problem with the education loan. He informed me that a lot of his fellow students had taken a loan from the same institution. It seems that the “systems” of that institution could not handle the repayment holiday built into the structure of this education loan (probably since the “system” had been built for “home loan” and not “education loan”) and hence the system continued to generate bills for the interest month after month for the interest accrued on the loan amount (even though it was not payable but was only to be accumulated). Since the bills were generated they showed up as overdue as they were not paid (obviously since the education loan agreement clearly provided for the payment holiday). This then got reported as a default to the credit bureau (see this article titled

Do you want to get married? Pay your bills on time for what is a credit bureau and its vital effect on our lives). It seems that a loan request of another student’s guarantor had been turned down due to this “default”. I have always understood the vital importance of a good credit record and have taken great care to maintain a spotless repayment record. Hence I was shocked by this. Fortunately my brother and his fellow affected students (with a lot of help from ISB) took up the matter strongly with the lender. Given the clout of ISB the lender took these complaints seriously. They promised to officially inform the credit bureau of the “system” error and ensure that the so called “default” was wiped off the credit bureau records for both the student as well their guarantor. In practice however they just got the credit report of my brother. They dismissed the requirement for my credit report by saying that their “systems” showed that they had not reported the “default” in my account to the credit bureau and hence there was no requirement to get a copy of my credit record. Given that my faith in their so called “system” was zero, we insisted that they get the credit report to prove their point. They were very reluctant and only after some heavy duty follow up we at last managed to get the credit report. My impression was that they were reluctant to get the report because of the cost of Rs. 50/- or so involved in getting the report from CIBIL. Given the fact that the entire mess was created due to the fault in their systems the casual manner in which they treated their own promise was scary and disgusting at the same time. Fortunately the credit report itself was clean of any issues but I had spent a good four weeks being tense.

Incident Number 2

This happened just around the same time as the first incident above was unfolding and I was yet to receive a copy of my credit report. To test out if any adverse record had been included in my credit report, I decided to apply for a credit card online with a leading foreign bank in India which offers a completely online process for credit cards with no requirements to submit any documentation or any verification calls. Imagine my horror when for the first time in my life my credit request was turned down. I was now sure that my credit report had been tarnished beyond repair. However very soon I did get a copy of my credit report (see first incident above) and it was clean as a whistle. So now I was left staring at another mystery. Why was my credit card request turned down? I got the answer soon enough after a few follow ups with the concerned bank. It seems that as per their records the bank had already issued the credit card I had requested a few years ago and as per their records I continued to hold that credit card. So naturally they could not issue me the same credit card again. They helpfully suggested that I could apply for any other credit card from their stable. What left me scared was that the bank showed a credit card as being owned by me whereas I never had that credit card. I wrote to them disclaiming any responsibility for any dues on that so called credit card held by me. I am still running scared if somebody will misuse this so called credit card and I will be saddled with the resultant impact on my credit report.

Incident No. 3

A bulky open envelope of my home loan lender (one of India’s leading private sector bank) with my name and address on it was handed over to the watchman of my building by a passerby who claimed to have found it on the road near my house. The watchman promptly delivered the envelope to my home. When I examined it in the night I was horrified to find the complete loan papers of my loan against property account (fortunately only Xeroxes and not originals). It included all my income tax returns and bank statements as well. What’s more there were similar papers for 7 other borrowers of the same bank. What were they doing in a envelope with my name on it? Who in the bank had access to these papers and what were they doing on the roadside? Did anyone in the bank miss those papers at all? What would have happened if the papers would have fallen in the wrong hands? Clearly the bank’s operational processes were treating our confidential documents in a completely cavalier fashion.

The common factor among all the 3 incidents above is operational failure. So what makes the lenders across sectors (the above 3 incidents involved an housing finance company, private sector bank and a foreign bank – and I have no reason to believe that the other kind of lenders are better at operations than these 3 are) so sloppy in operational matters. The biggest reason of course is that operations preparedness has lagged the appetite of lenders for making loans. The second reason is that they know they can get away with it with the worse that can happen to them being a rap on the knuckles. There are no laws governing the bank’s obligations to its consumers. At most we have RBI regulations and guidelines. None of them lay down the compensation payable to consumers by the lenders if they violate these guidelines. As these are not laws passed by parliament only the regulator can take action against the lenders for violation of such regulations/guidelines. The consumer can only complain to the regulator and wait for them to take action. Approaching consumer courts is time consuming (though not expensive) and most consumers are loath to use this route. In any case even where the courts hold that there is a deficiency of service on the part of the lender, the compensation provided is peanuts and has no punitive impact on the concerned lender. In more developed countries if the court rules in favour of the consumer on a similar issue it will perhaps award substantial damages to make sure that the lender will take all the necessary corrective steps to avoid a similar incident happening in the future.

So is there no hope for Indian loan consumers. That is not really true. A small beginning has already been made with the appointment of the banking ombudsman (which unfortunately does not cover housing finance companies and NBFCs) which is already having a positive impact. The Credit Information companies regulation act (which governs credit bureaus) with the rules made under it provide that banks will exercise due caution in reporting the correct figures to the Credit bureau. Unfortunately even this act does not lay down any remedy that the consumers can pursue directly against the lenders for wrong reporting of information (an example being incident 1). However the regulatory environment is now far more sensitive to these concerns and we should see more gradual progress in ensuring that lenders adopt the required operational procedures that will minimise the chances of the kind of incidents that Ii have narrated above. Off course if a smart politician gets hold of this issue (and has the patience to understand its wide ranging impact) it will not be long before we see parliament enacting laws on this. After all everybody loves to hate the lenders (though they serve a most useful function) and they will be a soft target for politicians to score brownie points with their middle class voters in an election year.

Harsh Vardhan Roongta is CEO, Apnaloan.com Services Pvt. Ltd.