Student Loan Defaults : Education loans, once a darling of Indian banks, aren’t growing on their books for the last few years. In fact, the exposure has been declining. The outstanding loans, as on November, 2019, fell to Rs 66,902 crore compared with Rs 71,975 crore in September, 2017.
On a year-on-year basis, banks’ education loan portfolio has shrunk by 3.5 percent in the twelve months to November, 2019. In absolute terms, the amount is not very big.
Nevertheless, the trend offers some insights to the state of the economy. There was a time when banks used to compete to grow their student loan portfolio, often running campaigns. What changed over the last few years? Of course, banks cut lending when demand slows or when bad loans from that particular segment begin to spike. In the case of education loans too, both aspects seem to have played a part.
Comparison of Education Loans in 3 Countries
The Terms of the Indian Education Loan are very unfair for the Students. Its almost like Russian Mafia.
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Firstly Student Loan Defaults
The Average Engineering Student gets Rs. 37,400/- Salary after finishing his graduation. This is the average for all Tiers in India.
An Average Indian Student has to repay an Average EMI of Rs. 22500/- for an Education which comprises around 60% of his starting salary. This is compared to 24% for a Chinese Student and only 18% for a Singaporean Student.
Secondly in Student Loan Defaults
The ENTIRE TUITION FEE must be borne by the Student in India. In China you have minimum 25% Subsidy and up to 100% Subsidy for the Top Colleges (Entirely Free). This means lower Principal and lower burden. In Singapore, Citizens get 60% Subsidy from the Govt and thus have to repay only 40% of the Tuition which means Less Burden
Thirdly Student Loan Defaults
There is no Concept of Minimum EMI in China or Singapore. In China a Student can pay 300 Yuan a month (Roughly around 6% of his salary) when his budget is tight while in Singapore a mere $ 200 a month is sufficient for the Banks not to ask questions. In India – though there is no such thing. You have to pay a Minimum EMI. If you pay Rs. 2000/- a month – your Bank Manager will call and question you
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The Education Loan in China or Singapore were introduced for the Students and the Country.
The Education Loan in INDIA was introduced for the purpose of Engineering Colleges.
Tom, Dick and Harry established Random Engineering Colleges and wanted to earn crores of rupees so he flouted fifth rate courses with fifth rate colleges and young naïve students decided to get an Engineering Degree and Banks were there to loan the money.
Engineering Colleges got their money, the Politicians got their cut and the Students and the Banks now lie desperate.
Rising Defaults in Student Loan Defaults
Of late, the education loan portfolio has been in the news for rising defaults, especially in the under-`4 lakh category, where loans are sanctioned sans any collateral. In June 2009, many public sector banks, chief lenders in this category, under the Indian Banks’ Association (IBA) banner, came up with a distress alleviation measure to help students who couldn’t secure a huge pay cheque.
The member banks arrived at a consensus to consider ‘genuine’ requests from students and extend relief on a case-to-case basis, depending on the merits of the rescheduling application. The respite would be in the form of extending the moratorium period to two years from six months/one year under ordinary conditions.
So why would someone not default?
The terms are unreasonable in Student Loan Defaults.
A Young Student paid and paid and paid Rs. 14,000/- a month and after 12 months he found the Engineering Loan Amount was not reducing so he went and asked the bank and the manager said “You should be paying Rs. 25,000/- EMI. Your 14000/- is just going to the interest”
So the student decided – why the hell do i burden myself and refused to pay causing the Bank manager to go begging for money.
The inner workings of the student loan
Globally, education loans have existed in some form or another for ages, but the origins of a widespread systematic government-led initiative can actually be traced back not to the US, but to ICETEX, a Colombian institution set up in 1950.
In the US, the groundwork for the present loan-dominated system goes back to 1972 with the Student Loan Marketing Association, which was created with the intention of servicing federally insured loans. By 1986, a market-based credit system was the system of choice for the World Bank, which advocated it in order to fund the rapid gap in higher education demand and supply that was occurring in the developing world.
India’s own experiences with government-backed loans date back to the 1962 National Loans Scholarship Scheme, which was eventually replaced with the current system of commercial bank-driven loans.
A Business Standard report recently pointed out that the enrolment in engineering courses in Indian colleges and universities declined from 4.25 million in 2014-15 to 3.77 million in 2018-19. The trend of rising bad assets from student debts is not unique to Indian market. Globally, banks are witnessing pain in their study loans portfolio.