Last month, the Madurai bench of the Madras High Court ruled that an educational-loan cannot be rejected merely on the grounds that the employment opportunity was poor and there was stiff competition during campus interviews. The loan amount sought was Rs.3.10 lakh. According to media reports available, the petitioner had provided sureties for availing of the loan amount.
All the details of the sureties offered are not known to this correspondent as yet. But what is worrying is the willingness of the courts to decide on what constitutes business risk. A financial surety may look good on paper, but if it is not recoverable, it is not worth the guarantee.
After all, banks are commercial enterprises. With increasing non-performing assets threatening to cripple the entire financial edifice, the court judgement ought to ring bells of alarm. Nobody would like a situation where courts begin to order banks to give loans.
The bank’s refusal could have been on two grounds: First, student-loan non-performing assets (NPAs) for all banks have been alarmingly high. By July 2015, they comprised over 10% of all disbursed loans. That is unacceptable.
Second, student loans given by banks in South India have been particularly vulnerable. It is therefore understandable that banks in South India choose to be wary.
Take a step back and consider the following: Over the last few years, banks have become skittish about giving out education loans beyond a certain limit citing high risk of default. The Indian Banks Association (IBA), an industry body of banks, recommended setting up of a guarantee fund, especially for loans under Rs.4 lakh. Some banks have even compelled applicants to take insurance policies against failure to repay loans, as a precondition to granting student loans.
NPAs for education loans were more manageable at 5.97 per cent (Rs.414 crore out of a total sum of Rs.6,937 crore outstanding) towards the end of 2011. But they went up to 9.6 per cent (Rs.761 crore out of Rs.7,897 crore outstanding) at the end of 2012.
By end of 2013, commercial banks in Kerala had increased their educational-loan NPAs by more than 40% during that calendar year, according to data before the State Level Bankers’ Committee (SLBC), NPAs under the education loan category jumped from Rs.761 crore to Rs.1,069 crore between December 31, 2012 and December 31, 2013.
Media reports talk of 42,328 NPA accounts under this head at the beginning of 2013 which swelled by 28.06% to 54,205 NPA accounts by end-2013. That constituted 14% of disbursals!
The situation continued to worsen. As reports from the Department of Financial Services (DFS), Ministry of Finance disclosed, by 31 December 2014, cumulative NPAs now stood at over 10% of disbursed funds. The DFS wanted the banks to meet a target of Rs 74,828 crore for education loans for the fiscal ending March 2015. Data is still unavailable, but it is doubtful if this target will be met.
South India figured prominently because its share of student loans had climbed to 54% of all disbursals. Just two states, Tamil Nadu and Kerala accounted for 38%. Contrary to this, states like Gujarat saw barely 50,000 students applying for loans. But that could be because people in mercantile states tend to start their own businesses rather than go in for higher education. Thus the banks in South India had reason to be cautious.
However, it would not be fair to blame the courts alone. Much of the blame must be put on legislators who see no harm in ordering banks to give loans without insisting on proper collateral. This is a malaise that began with the nationalisation of the largest Indian banks, then through loan melas of the 1980s (remember Janardhan Poojary) and on to loan waivers and write-offs under the UPA. And don’t forget those crony capital loans which have become a nightmare today.
The Modi Government has been trying – along with the Reserve Bank of India (RBI) — to stem this rot. For instance, when re-drawn, Andhra Pradesh and the newly created Telangana decided to offer loan write-offs, the centre refused to bail them out. Hopefully, such retrograde steps which corrode the very foundations of decent banking will come to an end.
But even within the Modi government, the hangover of the past persists. For instance, when the ministry of finance officials began discussing student loan NPAs early this year, one senior official was quoted stating that banks should not consider mortgage but should focus on employability. The irony is that banks are held responsible for loans turning bad. There is nothing in the banking code that allows loans to be given away without collateral or due diligence.
The most vulnerable are public sector banks which disbursed Rs.61,177 crore (87% of total funds) as of December 2014 to 26 lakh (86%) applicants. Since the finance ministry has the power to appoint bank chiefs, the latter are always susceptible to pressures from both the executive and the legislature. Is it surprising, therefore, that the courts too began expecting student loans to be granted more easily?
There are ways to stop this erosion of banks. First, make bank managers more accountable. That is already happening with the RBI insisting on more disclosures and the vigilance sleuths hauling up bankers wherever they see signs of financial impropriety.
But a lot more needs to be done.
Wherever the government wants a social touch to be given, it is time to draft a separate set of rules for such funds, maybe even create a separate fund, with properly codified rules which define the discretionary power of bankers. This will allow for financial inclusion on the one hand, and good banking practices on the other.
Without such measures the banker will find himself isolated – caught between the desire to behave professionally and the compulsion of not rubbing any bureaucrat or legislator the wrong way.
This is not the way banking should be done.