Moneylife » Inflicting bad education loans on banks: The FM wants to repeat his 2004-05 act Inflicting bad education loans on banks: The FM wants to repeat his 2004-05 act
Moneylife Digital Team | 09/10/2012 05:26 PM | Immediately after becoming the FM once again, P Chidambaram exhorted banks to dole out more educational loans. In 2004-05 he had done exactly the same thing, leading to large losses for government-controlled banks After P Chidambaram became the finance minister in August this year, one of the first things he did was to rail at banks (read public sector banks) to ensure that they dole out more educational loans. The finance minister even went as far to say that bank officers will be penalised for rejecting education loans without sufficient reasons. "Bank loan is the right of every student who meets the parameter. No bank can turn away an applicant. Every application for a bank loan must be received and acknowledged and every deserving candidate must be given the loan if the student meets the parameter," Chidambaram had said. While he has laced his admonishment with words like "who meets the parameter", bank chairmen know better. It was a directive from the FM. Will the banks feel pressured to lend more for education? Of course they will. If so, is the finance minister pushing the government-owned banks into a hole? Exactly what he did in 2004-05? Yes, directing banks to dole out more education loans was exactly what P Chidambaram had done in 2004-05—with alarming results. As the FM, P Chidambaram, had announced several 'incentives' to boost education loans during his budget in 2004-05. In the budget speech he said: * The requirement of collateral was dispensed with for loans up to Rs4 lakh. * Thus, no student admitted to any professional course, including courses in IITs, IIMs and medical colleges, will be deprived of the opportunity to study because of lack of funds.
What was the impact? In order to please the master, PSBs went into an overdrive—bloating their portfolio of education loans. Education loans multiplied by a stupendous 10 times since FY04 and have grown at a compounded rate of 35% in the same period versus industry credit growth of 23%, according to Espirito Santo Securities, which has compiled a very perceptive report on this. In the four years post the announcement of the incentives in the FY04 budget, education loans rocketed by 48%+ year-on-year. The proportion of education loans has steadily increased from 0.5% of total non-food credit to about 1.17% of total nonfood credit as of FY12. Similarly, the proportion of education loans increased from 1.46% of priority sector credit to 3.59% of priority sector credit as of FY12. When the FM orders, bank chairmen comply and then retire quietly. The bank is left with a portfolio of assets it would not want in the normal course of business. No wonder, education loans are going bad at an alarming rate. The gross non-performing assets of educational loans has swelled to 6% from 2%, in a couple of years, with a couple of banks having even reported that over 10% of their education loan portfolio is now at risk of being written off. Amazingly, the FM is doing it again. Either he has a bad memory of his actions, or he does not know or—as is most likely—simply does not care. As long there are public sector banks which can be milked for political ends, the taxpayers and shareholders are there to pick up the tab. The finance ministry, in the recent budget, had announced the formation of the education loan credit guarantee fund, which will be worth Rs5,000 crore, and where banks will be guaranteed 75% of the loan amount in case a student defaults. However, this is for loans up to Rs7.5 lakh where there is no third-party guarantee or collateral security. Evidently, Rs5,000 crore is still there is to be picked. With Pranab Mukherjee as the FM, the banks may have found ways not to lend. With Chidambaram as the FM now, they know better. As long a he is the FM, we may see a surge of education loans—a lot of which will duly go bad. Tomorrow: Bad loans are especially concentrated in the southern states, mainly Tamil Nadu from where the FM hails.
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