Education loan writeoff looks smarter than farm loan waiver of 2008

Finance Minister P Chidambaram has announced an interest writeoff and moratorium on education loans taken up to 31 March 2009 and outstanding as on 31 December 2013. The government will take over the liability for outstanding interest as on December 2013, but the borrower will have to pay interest for the period after 1 January 2014. The Centre will provide a sum of Rs 2,600 crore in the current financial year itself towards the proposal.

So over nine lakh students who took education loans before March 2009 will benefit from the Rs 2,600-crore interest rate writeoff proposed by P Chidambaram.

The Centre had introduced the Central Scheme of Interest Subsidy on Education Loan in 2009-10. It allows interest-free bank loans for higher studies to be given to students who meets the economic criterion.

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[caption id=“attachment_76719” align=“alignleft” width=“380”]  So over 9 lakh students who took education loans before March 2009 will benefit from a Rs 2,600-crore interest rate subsidy proposed by P Chidambaram. Thinkstock Images[/caption]

State Bank of India, which has over Rs 9,000 crore in its education loan-book, said the four-year moratorium on education loans will help banks regularise their loan accounts.

“The Finance Minister’s announcement augurs well for banks to regularise educational loan accounts which went irregular due to loss of growth momentum in the economy and decline in job opportunities,” SBI Chief Economic Adviser Soumya Kanti Ghosh said.

For banks, borrowers defaulting on education loans is a huge nightmare. The economic slowdown and prevalent high interest rates are pushing up non-performing assets (NPAs) to alarming levels and the number of educational loans that are not being paid back is also fairly high as usually there is no security against loans up to Rs 4 lakh. According to a Mint report,6 percent of student loans outstanding as of 31 March, 2012, had turned bad, up from 2 percent in March 2008.

On Sunday, the DMK tried to attract around 25 lakh educational loan borrowers by demanding the writing off of educational loans.

And in order to force defaulters to repay their loans, a few months ago, some banks in India had begun naming and shaming defaulters of educational loans, leading to huge outrage.

So while the finance minister’s decision onmoratoriumwill be a big relief for students who cannot afford to repay, or do not want to repay, a blanketmoratoriumwill also let wilful defaulters off the hook.

But compared to the farm loan waiver of 2008, which saw the government writing off loans worth Rs 72,000 crore, both principal and interest, this writeoff only involves interest not paid upto 1 January this year. The principal will still have to be repaid, and future interest too.

It is thus smarter.