Why Education Loans Have Become A Way To Socialise Losses And Privatise Profits

Prasanna Viswanathan, the chief executive officer of Swarajya, pointed out in a tweet a few weeks ago that from the US to Tamil Nadu there is a clamour for waiving of education loans. Let us examine the triple whammy of this system in India.

First of the triad is that the skills are costly and not too relevant to the fast-changing job scenario. Second, supply of graduates are superfluous and mostly of low quality. Then third, there are demand-side issues related to the labour market.

Education falls under Reserve Bank of India’s (RBI’s) priority sector lending, which mandates banks to direct 40 per cent of their credit to sectors such as agriculture, education, housing, micro, small and medium enterprises (MSME) etc. Banks hustle to make up for the shortfall in their lending to these sectors by purchasing priority-sector lending certificates from non-banking finance companies (NBFCs). In this tail-wagging-the-dog situation, there should have been a spurt in education loans, but that has not been the case.

In India, the education loan portfolio of Indian banks is around Rs 68,000 crore as of March 2019, down from around Rs 70,000 crore two years ago. On education loans, non-performing assets (NPAs) of state-run banks had risen to around 9 per cent as of March 2018 from 7.3 per cent in March 2016. Wary of the rising NPAs, banks have reduced lending to students for education.

In the model education loan scheme operated through the Vidya Lakshmi portal, only around 43,000 of the 1.44 lakh applications have been approved. The model education loan scheme offers collateral free loans up to Rs 7.5 lakh.

Recently, the Human Resources and Development Ministry issued a notice to restrict the applicable pool for the aforesaid loans to centrally-funded institutions, National Assessment and Accreditation Council (NAAC) accredited colleges and National Board of Accreditation (NBA) accredited programmes. This prompted Randeep Surjewala, the spokesman of the Congress, to attack the government of restricting education loans only to 1,056 institutions, thereby hurting students.

As the All India Survey on Higher Education points out, 78 per cent of the institutions are from the private sector (private or aided). Only 22 per cent fall under the public institutions category. The annual fee for engineering is around Rs 7 lakh and for medicine it is around Rs 23 lakh.

The private universities try to recoup the cost of education that they provide and also make a handsome profit. Only in February 2019, the University Grants Commission (UGC) forbade deemed universities from fixing fees and mandated states to form fixation committees.

It is pertinent to note that many of the higher educational institutions, especially in Tamil Nadu, are run by politicians or politically-connected people. By the way of education loan waivers, more students would be incentivised to take loans, study in their colleges and fill their coffers. The taxpayer will foot the bill for the low-quality education offered making it a case of socialising losses and privatising profits.

These funds then flow back as the proverbial ‘Rs 2,000’ for votes. Under the guise of being pro-student, the politicians are just being pro-themselves. Our regulators should face flak for this mess. As pointed out in the draft New Education Policy, they have designed a Kafkaesque system making it difficult for anyone not with political connections to run educational institutions.

LinkedIn periodically releases a list of top skills than can get you hired in India. If one peruses reports from 2016 to 2019, some of the in-demand skills include machine learning, data science, user interface design, statistics, public relations and economics. Notice that the skills are not listed in terms of degrees only. But it puts students majoring from say sociology, English literature, history etc, at a disadvantage from getting jobs easily unless they pick up other employable skills.

As Vinod Khosla put it, “Though Jane Austen and Shakespeare might be important, they are far less important than many other things that are more relevant to make an intelligent, continuously learning citizen, and a more adaptable human being in our increasingly more complex, diverse and dynamic world. When the rate of change is high, what one needs in education changes from knowledge to the process of learning.”

If the ability to get employed depends on one’s major, it also depends on the college. In engineering, while the IIT graduates get top rupee (and dollar), there is also this damning statistic of only 7 per cent of the 15 lakh engineering graduates per year have employable skills.

International Labour Organization recently reported that around 52 per cent of jobs in India are under the threat of being automated. The extent of job loss already caused by automation is a topic of further study.

Looking at the larger labour market, the National Sample Survey Office (NSSO) draft report released at the end of May pegged the unemployment figure at 6.1 per cent. The economists are battling amongst themselves on the number. Some of them have taken the question to the next level wondering if India has a ‘job problem’ or a ‘wage problem’.

Lastly, the larger economy is going through reconstruction. The economic growth for rate for 2018-19 was at a low 6.8 per cent. When the economic growth picks up and we hit the road to become a $5 trillion economy, at least the demand side of the problem will get a respite.

Let us explore in Part 2, the finances in the public institutions, the issues of how society perceives a higher education degree and what can be done about loan waivers.