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ROLE OF EDUCATION LOAN IN INDIAN HIGHER EDUCATION

Article · January 2013

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GALAXY International Interdisciplinary Research Journal_______________________ ISSN 2347-6915
GIIRJ, Vol.1 (2), DECEMBER (2013)

ROLE OF EDUCATION LOAN IN INDIAN HIGHER EDUCATION

RAJESH TIWARI*; DR. BIMAL ANJUM**
*ASSISTANT PROFESSOR,
ASIA PACIFIC INSTITUTE OF INFORMATION TECHNOLOGY
PANIPAT, HARYANA

**ASSISTANT PROFESSOR, DEPARTMENT OF COMMERCE,

DAV, COLLEGE CHANDIGARH

ABSTRACT: The paper explores the role of educational loans for development of human
capital in India. For a country with the largest population of young people (704 million),
combined with a poor gross enrollment ratio, availability of educational loan is a necessity to
ensure supply of skilled manpower for the economic progress of the country and to improve
wealth distribution. The move towards privatization of higher education and poor budgetary
support further increases the importance of educational loans for the country. For every 1% rise
in GDP, demand for education loan rises by 3% (Chakraborty, 2011). In spite of consistent rise
in outstanding amount and accounts of educational loans the issues of poor access to banking
services, complaints regarding rejection of loans by banks and neglect of vocational education
require urgent attention by the stakeholders. The proactive and student friendly approach by the
new finance minister provides hope to millions of deserving students to get access to educational
loans. The paper concludes with recommendations on enhancing the utility of the educational
loans to improve access and employability of the students.

KEYWORDS: GDP, Gross Enrollment Ratio, Access, Employability

1. Introduction:
The higher education sector in India has gone tremendous change in the last few years. Growing
demand and lack of capacity in public sector institutions and withdrawal of government’s
budgetary support has led to exponential growth in the private higher education institutions. But
is it adding value to the society and justifying its presence to the stakeholders? Are we moving
towards a scenario of better access, quality and governance? The paper dwells on these issues
with regards to access to higher education through education loans. Table 1 shows the significant
contribution of private sector in higher education.
Table1: Distribution of Universities in India (as on September 2012)

Type of Institution (Total 613) Contribution

Central Universities 44 7%
State Universities 299 49%
Private Universities 140 23%
Deemed Universities 130 21%
Source: University Grants Commission
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2. Need of Education Loan:

The need for a robust system of higher education financing arises on account of demographic
challenges, trend towards privatization, and poor budgetary support.

2.1 Demographic Challenges:

India has one of the largest populations (704 million) of young people below 30 years of age.
(Euromonitor, 2012). To provide gainful employment higher education is important. The access
of good higher education will contribute towards development of human capital necessary to
take the economy to new heights. Table 2 shows the projected trend of population. The
population of people in working age forms the largest section of the population. The population
of people in age group of 15-64years is expected to rise to 908 million by 2021. Providing skill
enhancement opportunities to such a large population is a great challenge. Table 3 shows lower
expenditure on education as compared to other countries.
Vision of 12th five year plan (2012-17) on higher education is “Achieve further access to higher
education through a mission mode national programme of creating new universities and
increasing the intake capacity of the existing universities and colleges. Access is real
opportunities for everyone to avail themselves of high quality, meaningful education at
affordable rates (Mahajan, 2012). In India the Gross Enrollment Ratio (GER) of 13.5% is almost
half of World Average (24), about two third of developing countries (18%) and significantly
lower than developed countries (58%) (UGC, 2012). 12th Five Year Plan (FYP) (2012-17) targets
a GER of 30% (UGC, 2012). The easy availability of education loans will provide the resources
to improve the gross enrollment ratio. This is all the more important due to increasing
dependence on private sector for higher education.
The number of engineers per million people, India has only 214 with South Korea having the
highest number 1435. While Japan has 765 engineers per million people, China has 340. The
doctorate degrees are less than 1 per cent of graduate engineering degrees in the country. The
percentage of doctorate degrees compared to engineering degrees is much higher in most of the
other countries, e.g., 9 per cent in the US, 10 per cent in the UK, 8 per cent in Germany and 3 per
cent in South Korea (Chakraborti, 2011).

Table 2: Population Projection of India (in Millions)

Year 2001 2006 2011 2016 2021 2026
Total 1,029 1,112 1,193 1,269 1,340 1,400
Below 15 years 364 357 347 340 337 327
15-64 years 613 699 780 851 908 957
Above 65 years 49 56 66 78 95 116
Source: Reserve Bank of India

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Table 3: Expenditure on Education (Human Development Report 2011)

Spending on Education as Spending on Education as a

Country a percentage of GDP Country percentage of GDP
Denmark 7.8 UK 5.5
Norway 6.8 South Africa 5.4
Sweden 6.6 Switzerland 5.2
New Zealand 6.1 Brazil 5.1
France 5.6 Russia 3.9
United States 5.5 India 3.1
Source: UNDP

2.2 Trend towards Privatization:

The participation of private sector is increasing day by day. The budgetary support for higher
education is low, with the central government funding on higher education at 1.25% of GDP
(UGC, 2012). Private institutes now account for four-fifths of the enrollment in professional
higher education and one-third in overall higher education. According to the FICCI and Ernst
&Young report on higher education 91% engineering schools, 95% pharmacy, 64% business and
50% medical schools in India are non-government. The national skill development corporation
has the target is to cover 500 million people cumulatively by 2022 under skill development
programs. The national skill development policy recognizes that 93 per cent of the country’s
workforce is in the unorganized sector, but contributes only 60 per cent of GDP.

3. Current Status of Education Loans:

“Education loans include loans and advances granted to only individuals for educational
purposes up to `10 lakh for studies in India and `20 lakh for studies abroad, and do not include
those granted to institutions”(Reserve Bank of India). Recent estimates suggest that for every
one percent increase in GDP, demand for education loan increases by 3 per cent, and demand for
housing loans increases by 5 per cent (Chakraborty, 2011). Indian banks association (IBA)
prepared a Model Educational Loan Scheme in the year 2001 which was advised to banks for
implementation by Reserve Bank of India in 28 April, 2001. The scheme was subsequently
modified by IBA from time to time. Table 3 shows the revised guidelines of the Indian Banks
Association.

The education loan is expected to grow at a rate of 32.3 per cent in 2009-10 and at 39.8 per cent
each in 2010-11 and 2011-12 and 44.8 per cent during the period 2012-13 to 2014-
15(Chakraborty, 2009)

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Table 4: Norms of Education Loan

Limit of Loan
For Studies in India Rs. 10 lakhs
For Studies abroad Rs. 20 lakhs
Interest to be charged at rates linked to the Base rate as decided
Rate of Interest by individual banks
Security Norms
Up to Rs. 4 lakhs No Security, Parents to be joint borrowers

Collateral security in the form of suitable third party guarantee;

parents to execute the document as joint borrowers. However the
Above Rs. 4 lakhs and Up to Rs. 7.5 bank may waive the third party guarantee if satisfied with net
lakhs worth of parents.
Parent(s) to be joint borrowers. Tangible collateral security of
suitable value acceptable to bank, and assignment of future
Above Rs. 7.5 lakhs income of the student for payment of installments
Repayment Schedule
For loans up to Rs. 7.5 lakhs Up to 10 years
For loans above Rs. 7.5 lakhs Up to 15 years
Margin
Up to Rs. 4 lakhs Nil
Above Rs. 4 lakhs (Studies in India) 5%
Studies abroad 15%

15 days to 1 month, but not exceeding the time norms stipulated

Disposal of loan application for disposing of loan applications under priority sector lending.
Source: Indian Banks Association

The banks are adopting a cautious approach in sanctioning the education loans which is
detrimental to increase the access of higher education. In a recent meeting with chiefs of public
sector banks the new finance minister, Mr. P.Chidambaram, said “"One case of application
rejection or two cases may be an oversight issue, but if the branch reaches a critical number like
five or ten cases of rejection then there can be action against the manager," This is a move
prompted by large number of complaints for rejecting applications for educational loans. There
are about 5200 complaints in educational loan including denial of loans (Verma, Suneja, 2012).
Justice D Hariparanthaman commented while delivering a verdict in a case of denial of education
loan by Punjab National Bank that “Banks can’t deny education loans on the condition that the
academic performance of the student was poor in school”.(Times, 2012)
According to the revised guidelines of IBA students taking admission in private institutions
under management quota will also be eligible for the bank educational loans. But the fees under

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management quota to be considered up to the limit fixed by regulatory bodies for the payment
seats.
The scope of courses has been expanded now and covers any degree/diploma approved by a
regulatory body. Finance ministry has recommended banks to enter into MoU with educational
institutions to provide loans to the students (Kumar, 2012). Joint efforts by banks and
government bodies will increase the reach of the loan faculties and speedy approvals. In an
education loan mela (fair) organized in October 2012 by district administration in Madurai, 1800
applications were received in a single day. 25 banks participated in the mela (fair) (Times, 2012).
Indian Bank Association has recommended concession of 0.5% in education loans for girl
students. IBA recommends 1% interest concession may be provided by the bank, if interest is
serviced during the study period and subsequent moratorium period prior to commencement of
repayment.

Table 5: Growth of Educational Loan Accounts

Year No. of A/c of Educational Loans

2005 468207
2006 679945
2007 944397
20085 1246870
2009 1603385
2010 1911460
2011 2326812
2012* 2460000
Note: *till March 2012
Source: Ministry of Finance, Business Line

Table 6: Growth Trend of Outstanding Amount of Educational Loan

Year Outstanding Amount (Rs. In crore)

2005 6,713
2006 10,012
2007 14,283
20085 19,817
2009 27,646
2010 35,887
2011 47,591
2012* 49,069
Note: *till March, 2012
Source: Ministry of Finance, Business Line

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3.1 The Chinese Scenario:

From 1990 to 1997, the tuition fees of China’s institutions of higher learning increased at an
average annual rate of over 20 percent. (China.org.cn). To help qualified students who cannot
afford tuition fees, the state, while continuing to promote the reform of the school charges
system, allocated 744.7 million Yuan of special funds in eight batches from 1994 to 1999 to
subsidize such students, and backed this up with a series of steps, including scholarships, loans,
stipends, subsidies and reduction or exemption from tuition fees. In China a student may receive
a yearly loan of 8,000 Yuan (69596 INR as on 8th November 2012). The term of a loan is
generally less than eight years. The financing for higher education is through multiple support
mechanism of government funding, scholarships, education loans, stipends have yielded good
results and now nine Chinese universities have been ranked among top 400 by times higher
education network in 2012. The gross enrollment of China was lower than India but improved
significantly after 2002 and now it is almost double the enrollment ratio of India (Goswami,
2012), as shown in figure1.

Figure 1: Enrollment at Tertiary Level

Source: UNESCO, cited in India Education Review

3.2 Vocational Education:

The vocational courses offered by ITIs, ITCs, Polytechnics and other technical institutions /
bodies were not covered in the Model Educational Loan Scheme formulated by Indian bank
association. However to support the government initiative to improve skill enhancement Indian
bank association came up with new guidelines in May 2012 for providing educational loans for
students opting to undertake vocational training in recognized institutions. The courses would
include Vocational / Skill development courses of duration from 2 months to 3 years. Table 7
shows the financing limits decided by Indian bank association. The guidelines have relaxed
margin and collateral requirements, however the parent will execute loan document along with
the student borrower as joint borrower. Interest rate to be charged linked to the base rate of

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banks as decided by the individual banks or at reduced rate after considering the subsidy under
any government schemes or any concession as decided by the bank.

Table 7: Financing Limits for Vocational Studies Loan

Course Duration Quantum of Finance(Rs.)
3 months 20,000
3 to 6 months 50,000
6 months to 1 year 75,000
above 1 year 1,50,000
Source: Indian Bank Association

3.3 Credit Guarantee Fund:

The government is planning to come up with Credit Guarantee Fund (CGF) before the end of this
fiscal (2012-13), which seeks to provide education loans up to Rs.7.5 lakh without any collateral
security and third party guarantee. Under the Credit Guarantee Fund Education Trust (CGFT)
scheme, education loans up to Rs.7.5 lakh without any collateral security and third party
guarantee, would be covered up to 75% of the amount in default.

Recommendations:
Poor banking access (50% people do not have bank accounts) to a large section of people
restricts the access of educational loan to meritorious and deserving students. The banking
regulators and other stakeholders need to come up with a framework to provide access of
educational loans through the public private partnerships and involvement of self help groups, to
unbanked people. National level test could be conducted only for the remote and backward areas
to identify talented students who would then be given educational loans.
Provide educational loans on first priority to first generation of higher education students. Since
the resources for educational expenditure are scarce in India, the reservations should only be
allowed to the first generation higher education students. A student going for higher education
first time in his family would be considered a first generation higher education student. Though it
may sound difficult to implement. A system to prepare data of the citizens through Aadhar card
like scheme may make it feasible. A family should get only one chance to get reservation or
scholarship or subsidized education loan. The reservations on the basis of social castes should
also include the population residing in areas devoid of basic amenities and banking services. This
would enhance the access and equity expansion of higher education through educational loans.
The government should reduce the budgetary allocation from the premier institutes and support
private institutions in scholarships and loan guarantee for the talented students from the weaker
sections. The students in the premier institute’s gets subsidized education from public funds but
enjoy private benefits for a longer duration. The government should only provide guarantee for
the student of these institutes and increase the fees of these institutions. The premier institutes
should be encouraged to replace government budgetary support with higher fees recovered
through educational loans and corporate donations made by the alumni. Income tax exemption

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may be granted to those contributing towards higher education of weaker sections. The profit
motive in private higher education institutions need to be justified with the return on investment
achieved by a student from the study. “the private sector would have to recognize that artificially
created inflation driven by unreasonable profit motives would be a constraint to our growth and
development ambitions” (Chakraborty, 2011)
On the lines of floating rates of loan the interest rate charged should be linked to the a designated
percentage of income earned by the graduate after completing the higher education. The
moratorium period may be made more relaxed to incorporate the economic uncertainties.
Credit Rating of the institutions on the basis of employability, infrastructure, quality of faculty,
industry academia interaction must be made mandatory. The ratings will provide useful basis of
comparison between institutions for students and banks to assess the repayment potential of the
loan. The institutes should be allowed to recover a greater portion of the operational cost through
the student fees.
Dual degree program that allow students to work in industry to part finance their study and also
get work experience which will improve their employability. Innovative delivery modes like e-
education to reduce the operational cost and reduced fee structure, which may be easily financed
through educational loans disbursed through self help groups or financial institutions will go a
long way to propel India to the status of an economic superpower by capitalizing on the
demographic dividend.

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