NEWS & ADVICE : EDUCATION LOANS
Government to guarantee student loans: Arjun Singh
By Neelima Shankar
May 20, 2008
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In a revolutionary move by the HRD Ministry, Arjun Singh, has stated that, the government of India would provide sovereign guarantee to students to help them avail loans for higher and professional studies. This statement comes in light of the forthcoming elections and has been used to highlight the problems associated with the present cumbersome and tedious processes involved in the sanction of educational loans. The insistence of banks on collateral security (security pledged for the payment of a loan) and parental guarantee, the process had become very cumbersome and tedious.

Speaking on the occasion of the fourth Assocham conference on reforms in the higher education sector, Singh, hinted that an official announcement could be made anytime. He admitted to the urgent needs of certain reforms in higher education. However, Singh maintained that the fate of reforms and the extent to which they would be carried out should remain within the domain of academicians and not the private sector.

This present proposition would definitely help both banks and students as by guaranteeing the loan, the government will make the job easier for both the parties. Loan from a bank is always preferred to loan from the government as the former can be relied upon where due care is important. Also, the documentation is thorough and complete in all respects and end use of the loan is generally ensured.

However, there is one risk which is present in any bank loan that is guaranteed by the government: Banks may relax recovery efforts since the government has guaranteed the loans anyway. Further, there is a belief that the banks may not want to insure these loans. They may expect the Reserve Bank of India to categorize these loans as zero-risk loans so capital adequacy norms become inapplicable.

Put differently, banks do not have to set apart any capital before sanctioning these loans. This could lead to a disastrous situation where unsettled loans pile up making it impossible to sanction new loans. After all, fresh loans cannot be issued unless the loans sanctioned earlier are recovered. Unless and until the funds are returned, fresh loans cannot be granted. The problem is heightened as the government takes its own time to honour its guarantee. Going by experience, the government generally lives up to its promises in the fag end of its time i.e. it may honour the guarantee around the time the elections are announced which means once in three or four years, the government will reimburse the overdue loans to banks.

Going by past behaviour, one can safely say that the government will reimburse only a part of the overdue loans to banks. This would lead to the same problems faced by the country in the small and micro industries, regarding subsidies, with the demand for subsidy always more than the subsidy that the government can actually provide. One can only hope that these aspects would be looked into by the government before the announcement is made.

Singh’s junior, minister of state (MoS) for HRD, D Purandeswari exposed the problems in the present education system, stating, that most of the academic institutions had been running short of faculties to the extent of 25 to 30 per cent. She expressed the need to take care of this shortage so that the students could be imparted education without any break.

She further called for ‘private participation’ in running even government-managed schools, colleges and other institutions of higher learning as the expertise available with the private sector would help the government in churning out innovative courses and providing better opportunities. It could also help bring better jobs to students with convenience, training them for the future.

However, teachers can be sourced and the faculty-shortage reduced only if teaching is made an attractive and lucrative career. There is no financial incentive for teachers as they are paid miserly and hence, efforts should be made to ensure a better future. Teaching as a career needs to be made attractive, otherwise, schools and colleges will lose out to the corporate world, as is the growing trend. However, one cannot fail to notice, the difference in opinion of the two ministers. Where Ms. Purandeswari is strongly, for private participation in running schools, colleges and other institutions of higher learning, her boss, Singh, believes that the fate of reforms in higher education and the extent to which they would be carried out should remain within the domain of academicians and not the private sector.


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