Recent rulings of the Kerala High Court and the Patna High Court on education loans and repossession of vehicles, respectively, have put bankers in a fix. In May, the Kerala HC passed an order saying that an application for an education loan could not be rejected by lenders on grounds of a low CIBIL score and that lenders should adopt a more ‘humanitarian approach’ while considering such applications.
In a separate ruling last month, the Patna HC observed that banks and finance companies cannot use recovery agents to forcefully seize vehicles of customers who have defaulted on car loans, without following the proper procedure under law.
Education loans
Bankers said the performance of education loans across the banking system has historically been poor. This is primarily owing to lack of collateral, moratorium on interest repayments till the completion of the course and lack of repayment ability of parent guarantors in many cases.
“Many, who take loans to study overseas, are sincere and repay them, but others vanish. It becomes difficult to approach the parents because many are elderly and others may not have any earning capacity. Since the loan is unsecured, we will have to write it off,” the chief of a private sector bank said.
Another senior banker with a private bank said lenders grant education loans after ensuring there is a strong case that the education could lead to a good employment and subsequent repayment of loans. Lenders also review the guarantor because usually the student does not have an independent means of income.
“There has to be a balance in terms of the type of loans, the end use of funds, what is the likelihood of getting a job because you do not earn any interest during the period of the loan and it keeps accruing. So, in three-four years, the repayment amount increases. As such, banks need to be careful and that is why we often look at parent guarantors,” the private banker said.
Bankers point out they do lend from a social perspective. “We give SME and agriculture loans but as a bank we are also responsible to ensure that the loan has a good chance of coming back in the normal course…,” they note.
Legal news website Live Law quoted Justice PV Kunhikrishnan as saying that students have to lead this country in future. The judge observed that he was of the considered option that a loan application ought not to have been rejected by the bank simply because the student had a low CIBIL score.
Repossessing vehicles
Lenders say due to the sheer number of delinquencies, obtaining a court order or approaching the police authorities for every single repossession would stretch the process and sometimes also lower the chances of recovery.
“The number of such kind of repossession are in thousands and I doubt whether the police has wherewithal to chase everything and recover everything for you. So while we are not condoning abuse by recovery agents, the fact is that if the customer has not paid the money after repeated reminders the bank has every right to repossess the vehicle…,” a senior private banker said.
Ramesh Iyer, MD, Mahindra & Mahindra Finance, recently told FE that repossession is the last resort and is done in cases where customers say they want to surrender vehicle as they cannot earn. Repossession is also done when the lender detects that customers are intentionally not re-paying but using the assets. In such cases, the lender uses legal mechanisms to repossess assets.