The Budget speech put forth an extension of the education loan subsidy scheme with a significant benefit for those who may have availed education loans before April 2009. The finance minister has proposed a moratorium wherein students will be excused from paying interest on education loans taken before 31 March 2009. Loans outstanding as on 31 December 2013 will be eligible for this benefit. The government will take over the liability for interest outstanding on 31 December 2013, but borrowers will have to pay starting January 2014.
At the moment, it’s too soon for banks to know the amount of the liability being passed on to the government. “We are yet to calculate the exact impact on our outstanding education loans,” said A. Krishna Kumar, managing director and group executive (national banking), State Bank of India. The government has given an estimated benefit of around Rs.2,600 crore for roughly 900,000 borrowers.
Now let’s assume that a student availed an education loan of Rs.10 lakh in April 2007 for a course which took two years to complete. The loan came at an interest of 12% per annum for a tenor of 10 years with no processing fees. The total equated monthly instalment (EMI) per month is likely to be around Rs.14,347. Now let’s say that on completion, the borrower did get a job and started to repay the loan as per the EMI every month. However, in December 2012, say, the student lost her job thanks to the economic slowdown and was not able to repay the loan EMI since then. In this case (assuming the bank hasn’t invoked the guarantee or declared the loan as a bad debt), the borrower would have an outstanding 12 months EMI ofRs.1,721,164 as on December 2013, out of this the interest amount comes to around Rs.63, 708. If we go by the Budget speech, this outstanding interest payment will be taken up by the government and paid to the bank on the borrower’s behalf. However, the borrower will have to continue paying dues from January 2014. (This is according to a calculation from Punjab National Bank website).
The announcement is referring only to payment of outstanding interest and not the principal portion of the EMI. The above is just an example. The final benefit will depend on the terms of the loan when the loan was taken, the interest rate and the period for which repayment is due.
Given that these loans were taken at least more than 4.5 years ago, the borrowers are likely to have finished their education and moved on to jobs or are at least in the process of looking for one. Given the difficult economic scenario in the country with the gross domestic product growth having fallen from 6.7% in FY09 to a budget estimate of 4.9% for FY14, it’s not surprising if many of those who availed education loans before 2009 haven’t been placed in jobs yet. “This is definitely a good move and will ease pressure from those who are still looking for jobs,” said Kumar.
It would be pre-emptive to say if this move will result in eventual full payment on part of borrowers or lead to an increase in non-payment of dues from this segment since the government is paying partly. But this is not a big portion of banking credit. As on 31 December, the total amount of education loans outstanding with public sector banks was Rs.57,700 crore which is approximately 1% of total credit outstanding across banks.
The above is from http://www.livemint.com/Politics/PiUd2WpbMRNRrRHOeaJJiJ/Interim-budget-FM-proposes-moratorium-on-educational-loan.html