Raghuram Rajan for flexibility in education loans

New Delhi: Expressing concerns over a large percentage of education loans going bad, Reserve Bank of India governor Raghuram Rajan on Friday called for designing these products in such a fashion that borrowers get greater flexibility.

“There are lots of NPAs (bad loans) in the education sector. They have been rising in the last few years. It's a matter of concern," he said in his speech at the Delhi Economics Conclave here.

He said due to the problem of rising bad loans that were extended for training and education purposes, banks have started asking for a collateral on such loans. 

"If it (the loan) is above Rs 4 lakh they have right to ask for that collateral but it is an issue."

Rajan said the new education loan products should have a provision wherein borrowers are given an automatic moratorium on repayment in they fail to secure a job within a specified time period after completing a course. Even now education loan borrowers get a moratorium on repayment of up to a year but it depends on fulfillment of certain conditions that are different for each bank.

He said the new loan products could also have some other features like enhanced interest rate on repayments if a borrower lands a high-paying job. Similarly if a borrower gets a job that does not pay that well then he can be charged lower rates.

"There are a number of plans floating," Rajan said, adding that education is the most important investment.

Chairperson of State Bank of India Arundhati Bhattacharya admitted that rising NPAs in education loans is a serious problem and said that guarantee fund being talked about for education loans that go bad will help in dealing with the issue.

Some estimates put NPAs in education loan segment to be in the vicinity of 7 per cent. Among the overall retail loan portfolio, education loans are an issue, chairman and managing director of Union Bank of India Arun Tiwari said. He said all deserving students should get education loans and bank should also do their due diligence.

The bank has tied up directly with education institutions to extend loans to their students, Tiwari said. Apart from general downturn when jobs were difficult to get, some of these NPAs are a direct result of fraud.In many cases cost of a course were inflated and loans secured. After getting the loans borrowers just did not pay up. As for upto Rs 4 lakh education loan no collateral is needed banks could do nothing to get them back.

Download the all new Deccan Chronicle app for Android and iOS to stay up-to-date with latest headlines and news stories in politics, entertainment, sports, technology, business and much more from India and around the world.