International Journal of Management and Strategy http://www.facultyjournal.com/ (IJMS) 2011, Vol. No.II, Issue 3, July-Dec 2011 ISSN: 2231-0703 ANALYSIS OF EDUCATION LOAN: A CASE STUDY OF NATIONAL CAPITAL TERRITORY OF DELHI R Srinivasan, Assistant Professor (Finance), Singhania Institute of Management & Technology, Gurgaon, INDIA Dr. Debabrata Das, Director & Professor, Indian Business Academy, Greater Noida, INDIA ABSTRACT The objectives of this paper is to study the practices followed in selecting the beneficiary student for grant of education loan for pursuing higher studies in India; problems faced by applicants; background of the problematic borrowers and steps taken to overcome the problems in getting loans. This research paper uses probit model for statistical analysis. From the analysis it can be concluded that a student pursuing postgraduate professional courses is more likely to get education loan than a student pursuing undergraduate course. Similarly, banks prefer giving loans to students seeking admission in government owned/approved institution. However, there does not seem to be any discrimination between students with or without prior work experience, for getting education loan. The study further reveals the reluctance of private sector banks in extending loans. This paper is useful to aspiring students. Key Words: Education Loan, Education System, Private Education, Probit Model, Financial Institutions, Banks International Journal of Management and Strategy ISSN: 2231-0703
INTRODUCTION Education is the process of instruction aimed at the all round development of individuals, providing with necessary tools to participate in day to day activities of the world. It dispels ignorance and boosts moral values in the individuals. It forms the basis for lifelong learning and inspires confidence to face challenges; besides providing skills to become more self reliant and increases awareness. Education not only impacts the human development and economic growth, but is the fundamental requirement of democracy. Through education, people become more responsible and informed citizens, and can voice their concerns and issues in political system of their society. It is an essential element for democracy and eradicating poverty. It also helps people in improving productivity, thus playing greater roles in economic life and earning a better livelihood for themselves and the society. Therefore, education is the key, which allows people to move up in the world, seek better jobs and ultimately succeed in their life. In India, getting education has been a big problem since long. A small minority in the elite class get access to excellent education facilities; whereas the poor practically get no education at all. One main reason for inadequate access to education in India is the high cost of education and lack of access to funding higher education. As per available data, over the years the government s share in overall education expenditure, which was 80 percent in 1983, went down drastically to 67 percent in 1999. The government spending as a percentage of GDP was a paltry 0.7% in the year 2008. This shortfall has been made-up by the private sector expenditure on education, which has increased by about 11 times in the last 15 years (Singh and Kaur 2008). It is mainly after Indian policy-makers, without much choice in this regard, cast the dice in favour of privatization in the 1990s. With the introduction of private player in education sector, the motive of revenue generation seems to have overtaken the social cause. This has probably led to a significant increase in the cost of pursuing higher education; resulting in, things getting out of reach of the masses. This has further led to the students looking for funding their higher education from external sources, like government and private sector banks, to meet their high education expenses. But this is easier said than done. Not all the students are fortunate to get the benefit of educational loans from banks. This not being a profitable business idea, the banks are reluctant to extend the study loans. According to a study by ASSOCHAM, less than 3 percentage students, mostly belonging to middle income families in India avail of education loans against 85 per cent in the UK, 77 per cent the US and 70 per cent in Germany and France. 2
Another area of concern is default by borrowers on educational loan. A possible way out of this, could be, student loans securitization feel Ismail, et.al (2008), who studied the potential of Asset-backed Securitization process in resolving the student loans problem, expect that the securitization process and the new financial instrument will benefit both the students and the government. While studying the factors associated with educational loan default rate in the USA (Steiner M. and Teszler N. 2005); the most likely defaulters on loan repayment, were the students with a low college grade point average; those who enter college at a late age; and the children born to less literate mothers. Similar empirical analysis on the role of student loan extended by commercial banks in India has also been studies (Narayana 2005). While studying the approach practiced by the Malaysian government agency; it was observed that most defaulters were the borrowers who performed badly in their study and studying abroad (Abiddin 2005). He further adds that attitudes, influence of friends, economic recession and family commitment were other main factors for the borrowers to delay/default in their repayment of the educational loan. Many students desirous of pursuing higher education complain about difficulty in obtaining approval of educational loans by banks. This aspect became a motivating factor for pursuing this study on education loan. Therefore, the objective of this study is to analyze the prerequisites looked for by the government as well as private sector banks for grant of educational loans to students for their higher studies. At the same time this paper also identifies the factors influencing the banks for sanction of educational loans. Besides, it tries to assess, as to which of these factors, have greater impact and which ones have lesser impact. This paper uses probit model to achieve this end. The plan of the remainder of the paper is as follows. Section 2 looks at the evolution of education system in India over the years. In the recent past India has witnessed a drastic change in government policy in the education system, leading to a drive towards allowing private sector participation in higher education, which forms the basis of discussion in section 3. The methodology, pilot study, data collection, design of questionnaire, etc. are discussed in section 4, with special focus on the emergence of NCR of Delhi as one of the major destination for higher education. The data on loan disbursal to students from different institutions, collected from the field work, are collated in section 5. This section gives us a birds-eye-view of the practices followed by banks for sanctioning of education loan. It also helps us in identifying different factors influencing the banks in sanction of loans. In section 6 all the identified variables are put through statistical testing, so as to identify the factors having greater influence on the bankers in sanctioning of loans. In section 7, the outputs obtained from the econometric model in the previous section, are tabulated and analysed through scenario 3
building. This helps in having a deeper understanding of the subject. Finally, conclusions are drawn and recommendations based on the results, are detailed in section 8. EDUCATION SYSTEM IN INDIA India is fast emerging as one of the biggest knowledge economy of the world. It has one of the largest pools of talent with excellent educational background, qualifying them for numerous higher educational programs in India and abroad. The cost of education is rising. However, their insatiable desire to acquire and enhance knowledge will stand them in good stead, in competitive times. Despite all odds, towards meeting this end, the students are ready to walk that extra mile. The opportunities are abundant; and the avenues to attain a student s career goals are immense; hence, Indian students want to grab these opportunities and make use of it to their advantage. For achieving their objectives, they are ready to stretch beyond their capacities and means. When their personal financial resources do not provide them with sufficient support, they go for external finance. This is where the role of financial institutions assumes great importance. The Government of India is also lending an active support, by relaxing the norms for granting educational loans to students and pushing the public sector banks to extend loans. In the working paper of Kapur and Mehta (2004), it is observed that the privatization is not a result of change in ideological commitments of the state, the judiciary or India s propertied classes; but, has resulted from a breakdown of the state system and an exit of Indian elites from public institutions. They thus feel that ground has been conceded to private sector institutions both within the country as well as abroad. They further add that due to the discretionary actions of the state, the education system remains suspended between over-regulation by the state on the one hand, and a discretionary privatization that is unable to mobilize private capital in productive ways, leading to a sub-optimal structuring of higher education. Singh and Kaur (2008) conclude that the academic inflexibility has boosted the rapid development of private initiatives in higher education; and perhaps, the providers/stakeholders in many of these private institutions are the loners who struggled to change the formal system to cater to the needs of the students. Agrawal and Meenu (2008) feel that the role of basic education and an increase in contribution of the government, as a percentage of Gross National Product, that is to be devoted to universities and research institutions, are the important determinants to ensure balanced development of education and an improved education systems at all levels. Privatization and commercialization of education will retard our human resource development at least in two ways (Mallick 2005). First, by shaping education prohibitively expensive 4
and thereby making it unaffordable for the vast multitude, and, secondly, by determining the education priorities, not according to our national needs but to those of a minuscule minority of blood-suckers. EDUCATION LOAN IN INDIA Securing education loan in India may sound easy, but is full of obstacles, and formalities. Government, in order to facilitate loan disbursal has simplified the norms; but, still there remain many more in place, that come in the way of a student getting educational loan. Some of the challenges faced by students as well as banks, includes customization of loan product to suit the requirements of the students and that of courses; margin money requirements; collateral security sufficient enough to cover the loan amount; proof of appropriateness of the University, College and Course applied for; timely approval of loan to meet the admission related deadlines; post disbursal issues etc. These activities consume a lot of energy, time, effort and money. The financial institutions use all relevant information available from different sources, and with the help of credit scoring models, do the credit profiling of the student. This helps it, in working closely with students and parents to try and design appropriate education loan program for them. TABLE 1 Education Loan Interest Rate Interest Interest Rate (in %) for Loan Amount Bank/product name rate 4 to 7.5 upto 4 lakh type lakh Above 7.5 lakh SBI India Floating 11.25 12.75 11.75 Bank of Baroda - India Floating 10 12 12 IDBI Bank India Floating 11.25 11.5 11.5 Allahabad Bank - India Floating 11.25 11 11 HDFC Bank India Fixed 12-14 12-14 12-14 Andhra Bank - India Fixed 11 12.75 12.75 Bank of India - India Floating 9.5 10 10.75 Bank of Maharashtra - India Floating 10.25 11 11 Canara Bank - India Floating 11 12 9.75 Central Bank of India - India Floating 10 10 10 Dena Bank India Floating 10 12.5 12.5 5
Federal Bank - India Fixed 13.25 14.75 14.75 Indian Bank India Floating 12.5 12.5 12.75 Indian Overseas Bank - India Fixed 10.25 11.5 11.5 Karnataka Bank - India Fixed 12.25 13.25 13.25 Oriental Bank of Commerce - India Floating 10.75 11.5 11.5 Punjab National Bank - India Floating 10.5 11.25 11.25 State Bank of Mysore - India Floating 11.25 12.75 NA UCO Bank India Floating 11.25 11.75 11.75 Union Bank of India - India Fixed 11.75 12.25 11.5 Vijaya Bank India Floating 11 11 11 City Union Bank - India Fixed 13.75 14.5 14.5 Punjab & Sind Bank - India Floating 12 12 NA Syndicate Bank - India Floating 10 10 9.5 United Bank of India - India Floating 10.25 11 NA Corporation Bank - India Fixed 11 12 NA Source: http://www.apnaloan.com/education-loan-india/rates.html [Accessed on 13 th Aug., 2010] The problem of default is worse, in the case of overseas education; as students change their address without informing the bank (Vidyalaxmi 2006). But, because of political pressures, public sector banks cannot simply stop giving study loans, or stop building their non-performing assets (NPAs), due to loan repayment default. Hence, to minimize the risk, most banks have now made it mandatory for the student's parents or guardians to be co-borrowers and therefore liable for repayment. The Reserve Bank of India is giving thrust on extending educational loans and the government has proposed to take over the interest burden during the moratorium period, for students from families, whose income is less than 2.5 lakhs per-annum; besides, banks prefer giving loans to meritorious students in order to be doubly sure that the applicant will not turn into a defaulter (Ghosh and Mousumi 2008). The list in Table 1 consists only of public sector banks. In the official websites of the private sector banks, education loan does not appear in the product offerings; probably because of high chances of default, education loans do not seem to be a lucrative area of business for them. Education being the priority sector, orders are issued by the government from time to time, to keep the interest rates on loans very low. This makes it less profitable business, simultaneously loaded with risk of default. This explains the behavior of 6
private sector and foreign banks in India, to virtually ignore this segment. Table 1 gives us a brief idea about the interest rates charged by some of the banks for education loans. The sums of loans for studies in India and abroad, offered by banks are different; with up to a maximum of INR one million for studies in India and up to a maximum of INR two millions for studying in universities abroad. The repayment period roughly ranges between five and seven years. During the moratorium period / repayment holiday, simple interest is charged. However, banks give something like 1 per cent concession in interest rates, if interest is serviced during moratorium period. Only Indian nationals are eligible for education loan. Generally banks do not demand any collateral for loans up to rupees four hundred thousand; but beyond this amount, collateral becomes essential. Most banks have explicitly specified that a student is eligible for loan approval only in case, where the course is recognized by the government or government agencies. Many banks insist upon the mother or father becoming the co-borrower. Banks charge up to 2 per cent penal interest on delayed payments. Processing fee varies from 0 per cent to 0.5 per cent of the loan amount. Loans are extended to cover almost all expenses (viz., tuition fee, hostel fee, library fee, books, equipments, laptops, caution deposits, building fund etc.) required for completion of study. Disbursement of loan can be in full or in installments; so as to match the demands stated by the respective educational institution. Normally, the loan amount cannot be below rupees fifty thousand. Margin money requirement of the bank can vary from 5 per cent for studies in India to around 15 per cent for studies in universities abroad. METHODOLOGY FOR SAMPLE SELECTION AND DATA COLLECTION: The data used in this paper was collected from primary sources through structured questionnaire based on fieldwork conducted during January to March 2009. The study covered the educational institutes in National Capital Region (NCR) of Delhi. The NCR of Delhi comprises of New Delhi, Gurgoan, Faridabad, Ghaziabad, Noida and Greater Noida. A news item appearing in Delhi Capital (2009) highlights, that education in Delhi has seen a tremendous growth over the last few years with new colleges and research institutes being established. It further adds that Delhi has always been the education hub of India with the track record of producing great talents. It has universities, colleges, schools that compete with the top in the country. Besides, NCR of Delhi, there are many other education hubs in India, e.g. Pune in Maharastra, Bangalore in Karnataka, Meerut in Uttara Pradesh, Bhubaneswar in Orissa, etc. Since NCR of Delhi has largest number of institute in India, it was chosen as a representative for the study. 7
For determining actual sample size and testing the questionnaire, a random pilot survey with 21 questionnaires was conducted. Using probabilistic sampling method of confidence interval approach, the paper got 342 2 samples for the study. In confidence interval approach the sample size n ( Z ) 2 / e where Z is confidence level, σ is the standard deviation and e is allowable error of this estimate. The paper estimates the sample size under 90 percent confidences with 10 percent allowable error level. However, the standard deviation of loan amount is found to be INR 35.44 thousand. Out of 342 samples, 282 are beneficiary of study loan and rest, nonbeneficiaries i.e., those applied for study loan, but did not get the same. The non beneficiary sample is taken in this study, is the control group for the analysis of educational loan system in India. The ratio of beneficiary and non beneficiary is approximately 5:1. The target group of beneficiary and non beneficiary respondents is undergraduate and postgraduate professional students of various institutes in NCR of Delhi. Finally the questionnaire is designed based on objective of the study. DATA ANALYSIS After privatization of higher education, cost of education became high for people in a developing country like India. Education loan seems to be an effective way to sail over it. Education loans are offered by both government as well as private sector banks. Out of 342 respondents eighty-two percent are beneficiaries of education loan. Eighty percent of the beneficiaries go loan from government banks and only remaining twenty percent benefitted from private banks. The rejection rate in the case of private banks is as high as sixty percent, whereas the rejection rate is only about thirteen percent, in the case of public sector banks. This shows the reluctance of private sector banks in extending educational loan; it does not appear in the priority list of the private banks, which acts as a deterrent for students in approaching private banks for loans. Statistics further reveal that the banks prefer extending loans to students enrolled in government owned / approved institutions. Over sixty-six per cent of the beneficiary respondents were enrolled in such institutes, whereas only seventeen percent of the respondents from unapproved institutions got education loans. It was also observed that the majority of respondent beneficiaries were pursuing professional courses at post graduate level. Work experience does not seem to be a major consideration while extending education loan. 8
ECONOMETRIC MODEL This paper has used the probabilistic probit model (Stock and Watson, 2005), for analysis. A similar study was conducted (Greene 1989) where, an alternative method of analysis, the Tobit technique was presented; which not only identifies the characteristics of borrowers who repay their loans and those who default, but also the magnitude of such default. For Probit Model, the dependent variable Y can have only binary values, for representing whether the institute is government approved or not. The probability of the occurrence of an event is determined by: Pr( Y 1: X, X 2..., X K ) ( 0 1X 1 2 X 2... k X 1 k Where, Φ is the cumulative standard normal distribution function and X1, X2, etc are independent variables or regressors. The probit coefficient β 0, β 1, etc., do not have simple interpretations. The model is best interpreted by computing predicted probabilities and the effect of a change in regressors. The predicted probability that Y=1, given values of X 1, X 2..., X K is calculated by computing the z-value, Z X X... 0 1 1 2 2 k X k and then looking for corresponding z-value in the normal distribution table. ) Table 2 defines the variable used in the model. The dependent variable EL again can take only binary values for Y i, with value 1 represents that the respondent has got the educational loan and 0 indicates otherwise. Dependent variables EL Education Loan TABLE 2 Definition of variables = 1, If respondents got educational loan 0, otherwise Independent Variables B Type of Bank E = = 1, If it is government / public sector bank 0, otherwise Work Experience 1, If the respondent has work experience 0, otherwise 9
C Type of Course = 1, If the respondent is post graduate student 0, If the respondent is under graduate student I Institute = 1, If the institute is government owned / approved 0, otherwise FI/L ratio Annual family income is to loan ratio = 1, If annual income is greater than loan amount 0, Otherwise The independent variable B categorizes all respondents into two categories viz. 1 indicating that the respondent approached government / public sector bank for educational loan, while 0 when respondent approached other banks. Next two variables (E and C) are used for capturing work experience and the type of course enrolled for, by the respondent. A respondent having work experience and enrolling himself for a postgraduate/professional course has a better chance of getting employment after completion of the course; hence, he is more likely to be offered educational loan. Similarly, variable I captures, whether it is a government owned / approved institute (value 1) or an unapproved one (value 0). The variable FI/L ratio represents the ratio of the annual income of the family, as to the loan amount the respondent asked for, from the bank. If the annual income of the family is greater than loan amount, the variable FI/L is assigned value 1, otherwise 0. From studying the family income one can assess, the capacity of the respondent beneficiary to repay the loan. ANALYSIS OF MODEL OUTPUT The dependent variable, i.e., approved loan, is regressed against all other independent variables, such as, type of bank, institution, course, work experience and income loan ratio. Upon regression on the 342 observations in the data set, it yields the following estimated regression function. The figures below the expression on right hand side of the function, inside the parenthesis are value of t-statistics. Pr( EL 1: B, E, C, I, FI/L ratio) (0.05 0.14 B 0.13 E 0.26 C 0.22 I 0.17 FI/L ratio) (3.40) (2.07) (3.96) (3.24) (2.62) The probit coefficients reported here, is estimated using SPSS software, by method of maximum likelihood which is consistent and normally distributed in large sample, so that t-statistics and confidence intervals for the 10
coefficients can be constructed in the usual way. The values of the coefficients are difficult to interpret because they affect the probability of getting educational loan via the z-value, but the sign and statistical significance are not. The estimated coefficient for type of bank is positive and strongly significant implying that with everything else held constant, the government owned banks are more likely to offer education loan, than private banks. Since the coefficient of work experience and course taken by the respondent is positive and significant, therefore, the respondent having work experience and admitted into postgraduate courses, have higher probability of getting educational loan than others. On the other hand the positive sign of institute indicates that the lending banks are looking for government approved institute rather than unapproved institute. Finally, the respondents who have higher family income, have higher probability of getting loan, as can be observed from the positive relationship between income loan ratio and approved education loan, which is also statistically significant. We have tried to construct five different scenarios, for studying the readiness of the banking institutions in giving approval for education loans to students pursuing higher studies (Table 3). TABLE 3 Probability of Getting Educational Loan in Different Scenarios Scenarios Government Bank Work Experience Post Graduate Course Government Approved Institution High Family Income to Loan Ratio Probability of Loan Approval (percentage) 1 Y Y Y Y Y 83.65 2 N N N Y Y 67.00 3 Y N Y Y Y 80.23 4 Y N Y N Y 73.24 5 N N Y N Y 68.79 Note: Y= Yes; and N= No A look at scenario one reveals that when a student has some work experience; has higher family income to loan ratio; and wishes pursue postgraduate course from a government owned/approved institute; the chances of getting loan from a public sector bank, is the highest with 83.65 percent probability. If we look at Scenario two and five, when a student approaches a private bank for education loan, the chances of getting loan approval are 11
far lesser with 67 and 68.79 percent respectively, irrespective of whether the student wishes to pursue postgraduate study or otherwise. Again when we look at Scenario three, the chances of getting loan approval from a government bank is relatively high (80.23%), even when the student is without work experience, but with high family income to loan ratio, and is applying for postgraduate course from a government owned / approved institution. Even with the government banks, the chances are only about 73.24 percent, when a student approaches the bank for loan, to pursue other than postgraduate courses. CONCLUSION Financial resource crunch has often staved off the middle class Indian student from higher education. To add insult to injury, the fee hikes announced by premier institutes from time to time, have made quality education a distant dream for deserving youngsters with monetary disadvantage. Experts believe that getting a loan sanctioned by a bank, whether it is to pursue a degree abroad or from a premier institute in India is not difficult for a meritorious student. Banks have various education loan schemes for school, graduate and postgraduate studies in India. They prefer giving loans to meritorious students in order to be doubly sure that the applicant will not turn into a defaulter. Thus, stringent checks about both the academic background of the student and the credibility of the institute that he or she is applying to are undertaken to avoid any trouble. From the statistical analysis it can be concluded that a student pursuing higher, postgraduate professional courses is more likely to get education loan than a student pursuing undergraduate courses. Similarly, students seeking admission in unapproved institution has less chance of getting education loan. Banks do not seem to be discriminating too much between a student with prior work experience and a fresher. Available literatures reveal that default rate on education loan is a perennial problem across globe; especially, when the students leave the country for pursuing higher studies abroad, the risk of default increases further. Here, the students annual family income plays an important role in determining, whether he is extended education loan or not. In such cases either of the parents is made the co-borrower, thus drastically reducing the chances of default. Further analysis revealed that private banks do not prefer giving education loan. Interest rate on these loans is very low, even lower than the prime lending rates. Low lending rates coupled with higher risks of default does not make it a sound business model; hence the reluctance. However, the government is bound by political agenda to increase expenditure on education sector and promote higher education. Hence, the public sector banks being under the control of government do not have an option, but to extend loans to students. Some of the financial institutions, to overcome the problem of default, use all relevant information available from 12
different sources, and with the help of credit scoring models, do the credit profiling of the student vis-à-vis the educational institution. This helps it, in working closely with the students and their parents to try and design appropriate education loan program for them.b Thus, it can be concluded that a student is more likely to get education loan if he approaches a public sector bank. Additionally if the student has a higher family income and plans to pursue postgraduate professional study from a government owned / approved institution the chances of getting educational loan is phenomenally higher. REFERENCES 1. N. Z. Abiddin, Issues in Educational Loan Repayment in Malaysia, http://papers.ssrn.com /sol3/cf_dev/absbyauth.cfm?per_id=74357, Accessed 25th January, 2009, (2005). 2. M. Agrawal, Education in Third World and India: A Development Perspective. New Delhi, Kanishka Pubublication, xiv, 490 p., tables, figs., ISBN 81-8457-023-6, (2008). 3. Delhi Capital Explore your capital with us. (2009). http://www.delhicapital.com/delhi-education/. Accessed 25th June, 2009 4. Mousumi H. Ghosh, Educational loans getting lot more easier, Times News Network; (2008), www.timesofindia.com 5. Migali Giuseppe, Funding Higher Education and Wage Uncertainty: Income Contingent Loan versus Mortgage Loan, No 775, Warwick Economic Research Papers, Department of Economics, University of Warwick, (2006). 6. Laura L. Greene, An Economic Analysis of Student Loan Default, Educational Evaluation and Policy Analysis, Vol. 11, No. 1. (pp. 61-68), (1989). 7. S. Ismail, A. Serguieva, and A. Gregoriou, Implementation of Student Loans Asset-Backed Securitization in Malaysian Higher Education, Proceedings of the Global Conference on Business and Finance, May 28-31, 2008, San Jose, Costa Rica. ISSN 1931-0285, forthcoming 2008. 8. H. S. James, Mark W. W. Introduction to Econometrics, Pearson Education Pvt. Ltd., Singapore. 9. D. Kapur, P. B. Mehta, Indian Higher Education Reform: From Half-Baked Socialism to Half-Baked Capitalism, CID Working Paper No. 108, (September), (2004). 13
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