RBI Governor Raghuram Rajan has done well to caution students, at the Shiv Nadar University convocation last week, against taking on huge education loans—often from institutions which offer ‘useless degrees’—which they cannot always repay. With education loans rising rapidly, from Rs 28,579 crore in FY09 to R63,320 crore in FY15, though Rajan did not say as much, if reading, ‘riting and ‘rithmetic are to be sustained through education loans, then the fourth R—repayment—is equally critical.
A report by CRIF High Mark Credit Information Services pointed out that NPA levels in education loans are up to a whopping 7% with nearly 10% of active loans being 90 days past due, as compared to an average 1.5% default rate in case of home and car loans.
While education loans have spiralled, thanks to the Model Education Loan policy—this allows loans for up to Rs 4 lakh to be taken without collateral—a lot of the loans have been advanced without collateral. Given that such high NPAs render the education loan business unviable, while the government needs to backstop the loans of students who are from modest backgrounds, banks will need to come up with some innovative solutions—with, if need be, the government’s help in fashioning requisite laws. Some banks are, for instance, tracking students on their LinkedIn accounts and sending them reminders— the implicit threat is that potential employers and their circle of professional contacts will get to know they have defaulted on an education loan. If all future loans are linked to an Aadhaar number, and this is mandatorily linked to all bank accounts and credit cards, it should be possible to keep track of all those with education loans and, within them, the defaulters. Credit information company CIBIL has already said it will start including education loans while scoring students and that will also be a big deterrent as far as loan delinquency is concerned—linking CIBIL accounts to Aadhaar numbers will make the process more foolproof. Though this will not apply to loans taken for overseas education, one possibility is to change the law to allow colleges/universities to tag degrees paid for through student loans and to un-tag them only when the loan is cleared—that’s much the same thing that happens with the registration certificate of a car which is bought through a bank financing scheme. Threatening to ‘out’ students who don’t pay their loans will also force them to start evaluating the worth of the degrees they are taking loans for and to take a good hard look at the possible returns this could fetch in the job market—the point the RBI Governor was trying to impress upon them.