Financing Skill Development: Status of Model Vocational Training Loan Scheme. Priyambda Tripathi 1. Abstract

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1 Financing Skill Development: Status of Model Vocational Training Loan Scheme Priyambda Tripathi 1 Abstract This article aims to explore the ground realities of implementation of the Vocational Training Loan Scheme through interviews with the various stake holders involved including training service providers, bankers, students etc. The article is a preliminary exploration of issues that the implementing bodies face in promoting this scheme. It finds that one of the major challenges of the scheme is that banking systems are still not accessible to prospective applicants as they view banking and loan as intimidating processes. The article concludes that though the Vocational Training Loan Scheme shows great potential, it can deliver its services only if the service delivery agencies become more accessible to its beneficiaries. In the light of some of the current flagship skill development schemes offering free training, administering a loan product for the same target audience would be a challenge. Key words: Model Vocational Training loan, Indian Banking Association, Skill Development, Private Training Providers, Priority Sector Lending Introduction Amidst the current rhetoric on converting India from a scam India to skilled India one has to look at the financial feasibility of creating a talent pool of 500 million skilled youth by As per Twelfth Five Year Plan document only 10% of workforce has acquired formal vocational skills in India while the existing annual training capacity in the country is just 4.5 million. The accelerated economic growth has increased the demand for skilled manpower that has highlighted the shortage of skilled manpower in the country. As per Knowledge Paper on Skill Development in India, Learner First published by FICCI in 2012 Employees worldwide state a variety of reasons for their inability to fill jobs, ranging from undesirable geographic locations to candidates looking for more pay than what the employers have been offering. India is among the top countries in which employers are facing difficulty in filling up the jobs. For India, the difficulty to fill up the jobs is 48%, which is above the global standard of 34% in Some of the reasons cited for unfilled vacancies are lack of available applicants, shortage of hard skills and shortage of suitable employability, including soft skills. Skill development is a national priority and accordingly a new Ministry has been formed for Skill Development and Entrepreneurship. The Ministry may look at the current initiatives to mobilize 1 Priyambda Tripathi is a Masters in Social Work with specialization in Social Welfare Administration from Tata Institute of Social Sciences (TISS). She is also currently a PhD candidate at Tata Institute of Social Sciences (TISS). She has more than 7 years of experience in livelihood issues with leading organizations like SEWA Bharat, IFMR Trust and National Skills Foundation of India. She is currently a Consultant at The IFFCO Foundation, IFFCO Colony, Sector 17 B, Gurgaon. She can be reached at priyambdamishra@gmail.com

2 financial support for creating skill infrastructure. From a policy perspective the earlier government spelled out a clear strategy through National Skill Development Policy in the following words all stakeholders, the Government both at Centre and States, the enterprise public and private, and the direct beneficiary the individual, would share the burden of mobilizing financial or in kind resources for skill development. National Skill Development Corporation (NSDC) was established as a public private partnership initiative set up by the Ministry of Finance, under section 25 of the Companies Act. It has an equity base of Rs 10 crore, of which the Government of India share accounts for 49%, while the private sector has the balance 51%. NSDC works towards catalyzing private sector intervention in capacity building of youth through providing financial support in terms of loan, equity and grant. Currently, 100 corporate houses/private players/private education institutes are associated with NSDC for imparting vocational education and training in India. With the help of private players, NSDC aims to reach its desired target (150 million skilled persons) by year The government has attracted private players, not for profit organizations, cooperative and educational institutions through various schemes under Ministry of Rural Development, Urban Development, Labour and Employment, Agriculture, Food processing Finance, Human Resource Development, Minority affairs, Social Justice and Empowerment, Women and Child Development, Micro, Small and Medium Enterprises with a set target for skilling youth. The other initiatives include workshop of public sector enterprises organized by National Skill Development Agency to mobilize funds for skill development. The new provisions under Companies Act 2013 envisage 2% of net profit to be routed for corporate social responsibility activity. As per the section of Companies Act % of net profit for Maharatna companies would amount to about Rs.2000 crores. The most significant step in this direction is financing skill development through vocational loans by scheduled commercial banks for trainees. Keeping in mind the need to make training sustainable and demand driven a model vocational education loan scheme has been floated by Indian Banking Association (IBA) in A committee approved by Prime Minister s Council was set up to come up with a draft policy that would make skill training eligible for credit support. The committee chaired by Advisor to Prime Minister on Skill Development included Dept. of Financial Services and Chairman of Indian Banks Association(IBA) amongst others. After three rounds of meeting a loan scheme was finalized and subsequently a circular was sent on 31st May 2012 by IBA to all member banks on Indian Bank Association Model Loan scheme for Vocational Education and Training as an extension to the current Education Loan scheme. The new scheme enables loans for courses of duration of 2 months to 3 years, with no minimum age limit and no collateral; the parent would be a joint borrower. The moratorium period is a minimum 6 months after completion of course. As per Twelfth Five Year Plan the scheme would not only help students but also training providers who site financial reasons for low enrolment. Some of the private organizations have also come up with innovative loan products to cater to vocational trainees. The current study explores status of such loans,

3 response among bankers, beneficiaries and training providers, issues and challenges in administering the program. Salient Features of Model Vocational Training Loan scheme are as follows: Vocational Training Loan Scheme would be applicable to all member banks of IBA and other banks and institutions advised by Reserve Bank of India Applicable to courses of duration 2 months to 3 years run by by a Ministry / Dept./Organization of the Govt. or a company / society / organization supported by National Skill Development Corporation or State Skill Missions / State Skill Corporations, preferably leading to a certificate / diploma / degree, etc. issued by a Govt. organization or an organization recognized / authorized by the Govt. to do so The quantum of finance has been worked out subject to the following ceilings o For courses of duration up to 3 months 20,000 o For courses of duration 3 to 6 months 50,000 o For courses of duration 6 months to 1 year 75,000 o For courses of duration above 1 year 1,50,000 The loan covers expenses with respect to tuition fees, examination/laboratory/library fees, caution deposit, purchase of books, equipments and lodging as well as boarding in case necessary The rate of interest is linked to the base rate of the bank or at a reduced rate decided by banks There are no processing charges and no collateral or third party guarantee is taken For course of duration up to 1 year the moratorium period would be 6 months from the completion of course and for courses of duration above one year the moratorium period would be 12 months from completion of course Repayment for courses of duration up to 1 year in monthly installments can be made in 2 to 5 years and for courses above 1year the period specified is 3 to 5 years The IBA Model vocational loan Scheme has been launched by most of the scheduled commercial banks like State Bank of India, Central Bank of India, Dena Bank, Bank of India, Punjab National Bank and Bank of Baroda to name a few banks. Issues and Challenges: In order to understand issues and challenges in implementation of model vocational training loan scheme we conducted interviews with private training providers, bank officers and trainees of skill development center.

4 The following issues were highlighted: Lukewarm Response of Private Training Providers: The loan scheme was launched with much enthusiasm through joint efforts by National Skill Development Agency and Indian Banking Association in order to financially support trainees and training providers so that training becomes sustainable. However, the response among training providers towards the scheme seems lukewarm. Out of the three leading private training providers only one training provider had administered a loan product for training in partnership with financial service provider associated with National Skill Development Corporation i. The other two were not implementing an IBA Model vocational training loan scheme or any other loan scheme to fund training of students We interviewed one of the leading training providers which has opened skill development centers in North East, Rajasthan, Bihar, Jharkhand, Orissa and MP. The training is mostly student funded. The training provider is working on a skill financing model which entails a loan for students. The amount of loan offered is Rs with 18% reducing balance borne by training provider. The moratorium period of loan is 6 months payable in monthly installments. Matriculation certificate of student is considered collateral in this context. Follow up on loan repayment is conducted through post placement tracking. However, this experiment has not been very successful as students are not keen on taking vocational loans. The training provider highlighted the need to generate grass root awareness about the benefits of model vocational training loan scheme administered by scheduled commercial banks ii. Lack of awareness among students: We also interacted with trainees of one of the skill development centre operated by a leading training provider to understand the level of awareness about skill financing through vocational training loans offered by scheduled commercial banks. The following issues were highlighted iii : Reluctance to avail such a loan scheme due to the amount of paperwork and time taken in loan sanction. They also stated that the bank officials may not be receptive towards trainees who are school drop outs and belong to underprivileged households Quality of Training: The trainees also linked the quality of training to finance mobilized for taking up such training. They said that in case they see value in terms of lucrative career opportunities they would be interested in vocational training loan products to fund training even if the fees is high Apathy towards the scheme by implementing banks: We also interviewed bank officials to understand implementation of vocational training loan. As per the interview the IBA model vocational loan scheme has been implemented in 2012, however, the response among students is low. The bank officials undertake an awareness drive through distributing pamphlets and handout at skill development centres and Industrial Training Institutes. The training provider is not involved in the process of loan sanction and follow up for repayment of loan.

5 The off take is quite low. The bank officials could not disclose the number of loans sanctioned and the repayment rate. Even though vocational training loan is categorized under priority sector lending as per the guidelines of Reserve Bank of India (RBI) promotion of vocational training loan is not a high priority for banks due to an insignificant amount of loan involved as compared to other higher loan products. The bank officials have higher targets to chase and hence, not much attention is paid to smaller loan products like vocational training loan iv. Subsidized Training versus Training through Vocational Training Loan: Apart from the issues cited above it has been observed that most of the government schemes initiated for skill development through wage or self employment for the target audience which include unemployed youth, school drop outs and youth from marginalized communities and underprivileged households like National Rural Livelihood Mission (NRLM) by Ministry of Rural Development, Support to Training and Employment Programme (STEP) for women by Ministry of Women and Child Development, Skill Development Initiative Scheme by Ministry of Labour and Employment, Learn and Earn Program by Ministry of Minority Affairs offer subsidized training and sometimes a stipend as an opportunity cost for the time spent in training. Hence, in such a scenario when the training is free of cost for the same category of target group for whom the IBA Model Vocational Training Loan Scheme is designed; administering the loan product would be a challenge. It may be one of the reasons for lack of demand for vocational training loan on the part of trainees and lack of participation by training providers who are implementing the above mentioned schemes. Recommendations: A successful financing model for vocational courses depends on demand driven skill system. Resource mobilization requires that all the stakeholders, namely government, students and employers share burden. The IBA Model Vocational Training loan scheme has been formulated with the right intention of helping student pay for training which would increase employability. However, it has not been able to reach the target audience due to some of the reasons cited above. There is a need to revisit the modus operandi in terms of implementation through the following ways: Probe performance in terms of number of vocational training loan sanctioned, repayment rate for members of Indian Banking Association which are implementing the scheme as there is lack of data on the number of loans sanctioned and loan repayment to understand the demand for such a loan product Involve rural and urban credit cooperatives due to massive outreach and a community connect with their clients Awareness generation among trainees through financial literacy campaigns which increases their confidence in financial transactions with banks and other financial institutions Encourage Training Providers to improve the quality of training and operate on a fee based model so as to make training sustainable and demand driven which makes trainees credit worthy through increasing employability

6 Involve employers as guarantors for up skilling programs of un skilled workers so as to widen the scope of the scheme and involve industry as one of the key stakeholders Revisit the loan product to identify the target audience willing to pay for training References Website of National Skill Development Agency [ Website of National Skill Development Corporation [ Interview with Sr.Representatives of NIIT Yuva Jyoti Interview with Sr. Representative of IL&FS Skills Development Corporation Interview with 8 trainees of IL&FS Skills Development Corporation, D 114,Okhla Phase I, New Delhi Interview with Sr. Team Member of B Able Interview with Chief Manager, Training of State Bank of Patiala People matters [ India s skilling industry: In need of synchrony Annual Report of Dena Bank Annual Report of State Bank of India End Notes: i Interview with Private Training Providers(IL&FS Skill Development Corporation, B Able and NIIT Yuva Jyoti) ii Interview with senior representative of B Able iii Interview with 8 trainees of IL&FS Skill Development Centre, New Delhi iv Interview with Chief Manager, Training of State Bank of Patiala