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Bankers alert against student loan law

They are wary of possible political influence in sanctioning of the loans, reports BS Srinivasalu Reddy.

india Updated: Nov 19, 2006 21:27 IST

The nation's banking industry is on guard against possible political or other external influences in the sanctioning of mandatory loans for higher education, which has been proposed in the draft of a legislative bill  spearheaded by the Human Resource Development Ministry.

The draft bill aiming to encourage students to take up higher education and boost the nation's skill base, must garner the consent of various related ministries before it can be taken up for approval by the cabinet, after which it can be piloted in parliament.

The draft proposes that banks tie up with higher education institutions and on their recommendation offer clean loans that involve no security or guarantee to their students. It also proposes the setting up of agencies to provide refinance facilities for such loans and seeks guarantees against defaults.
 
“The banks want to reserve the right to sanction a loan. We cannot be forced to sanctioned a loan just because we have entered into a tie-up even when the customer in point is not eligible,” a senior banker who wished not to be named told Hindustan Times.

"We have to adhere to Know-Your-Client (KYC) norms, so we have to be left with the discretion. Besides, a climate for recovery of such loans should be created. Otherwise, some fake colleges could come up to stake claims for such loans," the bank official said, adding that these views have been sent to the Finance Ministry through the Indian Banks’ Association.

This argument gains significance in the context of several politicians setting up medical and engineering colleges without commensurate facilities in remote areas of the country.

Education is a state subject under the Constitution, and it is common in several states for political leaders such as legislators and local ministers to set up colleges that offer professional courses in disciplines such as medicine and engineering.

While these give them social prominence and clout, experts say the institutions do not necessarily offer education of acceptable quality.

Political leaders may be in a position to fix unreasonably high fee structures using their clout, making it difficult for banks to sanction loans to their students, one banker said.

On several occasions in the past, the Reserve Bank of India has also expressed its opposition to any kind of political influence in loan sanctions by banks.

The law-making draft proposes a committee to identify eligible colleges and institutions for sanction of loans and is also expected to study their fee structures.

Banks would ordinarily look into various factors concerning a prospective student borrower, such as her financial track record and that of her parents and the prospect of the course to fetch the student sufficient remuneration, which is an indicator of the ability of the student to eventually pay back an education loan.

In the US, the government makes refinance facility available to banks for education loans.

Based on that, the Indian draft also proposes refinance facility and guarantee cover by government agencies. But the Finance Ministry, strapped for funds, is yet to stamp its approval on this.

To check students with loans from getting away without repaying the loans, a provision to mention the loan in the degree certificate was incorporated in the draft bill, so that a prospective employer would know about the loan to be repaid by her employee.

Email: srinivasulu.reddy@hindustantimes.com