The financial meltdown of 2008 had left every inch of the global market in tatters. The assumption was that like the previous periods of recession, the markets would swing upward again after a few years. But this time, it never materialised.
I think that the world of technology underwent a complete makeover from 2011. New technologies like the Cloud, Analytics, Artificial Intelligence, Automation, the Internet of Things (IoT) and a booming startup environment destroyed every existing business model, back then. This had a cascading effect on every industry and affected the job market drastically.
One of the biggest impacts of all of this fell on the education industry, particularly on the ones who were and still are aspiring for higher education. Incidents of borrowers turning defaulters and educational loans becoming non-performing assets (NPAs) have risen exponentially. Weak market conditions have become the bane of job-seekers after completing their higher education. Once they step out of the job market, it has become impossible for them to enter it again, forget getting better job opportunities even after more education and improving their skills themselves.
This has also resulted in a considerable drop in the educational loans being provided to future candidates. Financial institutions have traditionally faced a recovery of educational loans for a long time – specifically, from willful defaulters. In India, this is why the recovery of educational loans was brought under the umbrella of The Securitisation And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act in 2002. The objective of this was to help financial institutions recover loans from willful defaulters easily. According to the act, willful defaulters are those borrowers who either have the means to pay back loans but do not pay willfully, or have taken loans citing one purpose and have diverted the amount for some other purpose, lost the money and are not repaying.
But this has become draconian now. It has been alleged that the banks misused the Securitisation Act to recover loans from every defaulter, even if they had defaulted because of macroeconomic conditions and reasons beyond their control.
Fortunately, the erstwhile Indian government and the Reserve Bank of India (RBI), the financial regulatory body of the country, took cognisance of the problem and came up with a smart and sensible solution. Three important changes have been made to the repayment policy of educational loans.
1. The education loan repayment period has been extended from five to 15 years.
2. The possibility of borrowers undergoing periods of unemployment between employment because of weak market conditions has been factored in.
3. The borrowers may not find employment with enough salary to pay the entire EMI amount initially. So, the borrowers can start repaying in smaller amounts and hike up amount to be repaid in due course of time.
To understand why this has been done, there are two scenarios to be considered.
1. For education loans above ₹7.5 lakhs, financial institutions take a collateral (in the form of land or gold or anything of value, etc.) – equivalent to or above the total loan amount to be repaid. But this is not just a mere exchange between a loan amount and an asset. Like every other loan, educational loans are also considered on the basis of the repaying capacity of the borrowers.
First of all, the borrowers are asked to provide a confirmation of admission from the institution where they wish to study.
Then, the financial institutions check if the institution (where the borrower wishes to study) is in their list of approved colleges.
After this, the borrower’s background is thoroughly checked. This includes their previous education history, work experience (if any), bank account details, financial credit score, etc. Borrowers are also asked to provide details of future job and salary expectations. This is done to ensure that financial institutions do not perceive any risk in repayment by the borrower.
But now, financial institutions are using the Securitisation Act to squeeze out money from every borrower without being sensitive to market conditions. It’s also alleged that whenever the loans become risky, they are shifting the blame entirely on to the borrower.
2. Broadly classified, there are two types of assets – tangible and intangible assets. Examples of tangibles assets are house, gold, land, etc. Educational loans, however, come under the category of intangible assets.
Using a tangible asset to recover the loan amount paid for obtaining an intangible asset is ideally a very tricky scenario. To do this, the ideal conditions are – either the degree has become worthless or the borrower is incapable of repaying. When the financial institutions themselves helped the borrower obtain the degree, they cannot claim it to be worthless. If the borrower happens to be a defaulter because of reasons beyond his/her control (such as macroeconomic issues) and is able to prove this in a court of law, the financial institutions will never be able to recover the loan amounts.
It is this deadlock situation that the government and RBI have decided to step into. They are trying to ease the pressure on both the lenders and the borrowers.
First of all, by extending the period allotted for loan repayment and dividing the repayment amount into equal EMIs over the entire duration, the EMI amount becomes considerably lower. In such a case, the possibility of borrowers becoming unemployed in between the periods of employment has been considered.
Finally, but most importantly, no defaulter can survive for 15 years without earning an income. Everyone has to earn money at a minimum level to survive. So, borrowers are given the opportunity to start with small payments and increase the amounts to be repaid during the life-cycle of the loan-repayment period.
There is a very important catch in the amendment that has been done. The amendment exercise was started in 2012 with further amendments in 2016. By default, financial institutions will consider the amended loan repayment scheme for new educational loans only. But, in my opinion, the amendment has not been done under the assumption that future borrowers can become defaulters and that those loans may become NPAs. The amendment has been done keeping in view the extreme distress the existing borrowers are undergoing.
If this is the case, it can be argued that existing borrowers will benefit from the new repayment scheme. The question here is, why hasn’t this been mentioned by the government and RBI? This is simply because financial institutions have more problems dealing with willful defaulters. Providing the repayment-extension period to all existing borrowers will benefit the willful defaulters as well.
So, if the borrowers, who have repaid loans in the past and have excellent relationship with the people they have dealt with in the financial institutions, become defaulters due to genuine reasons (such as the market conditions), they can approach the financial institutions and request for considering their loans under the new repayment scheme. If they are refused, they can approach the appropriate court with the request.
Ultimately, only the excellent credibility of the borrower will come in handy here. So, it is very important never to lose focus from the repayment of loans – and more importantly, maintaining excellent relationship with the financial institutions, communicating with them constantly and making them completely aware of the borrower’s plight.
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Featured image used for representative purposes only.