IBA recommends extension of repayment period for student loans to 10-15 years, to reduce defaults

It has been found that students find it difficult to repay loans in five-seven years as some of them are unable to get good jobs immediately. There are some dropouts too that worsen the default rate

The education loan scheme is set to get more 'student-friendly' if the key recommendation by the Indian Banks' Association (IBA) to extend the repayment period, from the current five-seven years to 10-15 years, is accepted.

IBA has submitted this recommendation to the Ministry of Finance and has also suggested the creation of a credit guarantee fund to address rising cases of default of education loans.

K Unnikrishnan, deputy chief executive of IBA told Moneylife, "We have recommended extension of the repayment period to 10-15 years. There are some students who are unable to get a good job immediately, and there are some dropouts in the midterm. For them, repaying becomes difficult and there are cases of default. With the extension of the repayment period, there would be less stress on the students to repay."

The IBA's education loan scheme was launched in 2001-02 under the leadership of TM Bhasin, chairman and managing director of Indian Bank.  

Mr Bhasin has been quoted by The Hindu as saying, "The cumulative outstanding under education loans for all banks stands at about Rs45, 000 crore as on date and the defaults are in the range of 3%-5%. The defaults are higher on loans below Rs4 lakh, which are collateral free."

According to the guidelines, banks lend up to Rs4 lakh without any security. But for loans between Rs4 lakh and Rs7.5 lakh, they can ask for only personal guarantees, and for a loan above Rs7.5 lakh collateral is required.

Experts say that these will be helpful for students, as extended repayment period will also lessen the EMIs (Equated Monthly Instalments) as the period will be stretched.

To overcome the problem of rising defaults, IBA has also recommended the creation of a credit guarantee fund. "To tackle the problem of non-performing assets and encourage banks to lend more, we have recommended the creation of a credit guarantee fund of around Rs4, 000 crore-Rs5, 000 crore," Mr Unnikrishnan said.  

He explained that "other recommendations, such as clarity on the eligibility issue and clarification on operational issues has also been recommended to make the process easier for banks as well as students."

Recently, Moneylife reported that 28 states and union territories have not yet designated the income certificate issuing authority required for students to avail of interest subsidy. This benefit is provided during the period of the moratorium on education loans for students from families with an annual income of less than Rs4.5 lakh.

Asked about this issue, Mr Unnikrishnan said, "We have asked our SLBCs (State Level Bankers' Committees) to speed up the process of setting up income-issuing authorities."



paramjeet singh

5 years ago

IBA should also work for reduction in interest rates for education loans. at present the interest rate is a whopping 15.5%! whereas one can get a Car loan for as less as 5.99%! it is shameful. in our country barely 9% children can reach the higher portals of Education and we cant even provide some relief for them to go for Higher studies. all sots of concessional rates are given for exports and even for luxuries but none for this basic and fundamental right of education.

Does a five-star board guarantee good corporate governance?

Rules and regulations are not enough. They must be implemented. Sadly, recent episodes have shown that even independent directors stayed silent when rules were violated

Very often, people look at high-profile membership of the board as a surrogate for good corporate governance, and micro-finance is no exception. But despite having the equivalent of five-star boards, many (NBFC) microfinance institutions (MFIs) in India have come under attack for various weaknesses in governancei . Here are some.

  • Inadequate checks and balances over executive decision-making and whimsical behaviour by the board and/or senior managementii
  • Insufficient transparency about ownership/control, related-party transactionsiii and the (MFIs/group's) operational strategies and overall financial positioniv
  • High stake acquired by promoters' friends/well-wishers/families in order to maintain control over the MFI.
  • Lack of transparent reporting to the outside world.
  • Lack of truly independent directors and board nomination sub-committees.
  • Conflicts of interest at various levels including on the board, in senior management and operations, and other aspects.

Interestingly, much of this is said to have happened despite many of these (NBFC) MFIs having, what bystanders would often call as the presence of a five-star board—a board packed with well known personalities from within and outside the industry. Indeed, this is where a common judgement made with regard to corporate governance has, often repeatedly, proved costly, both in microfinance, perhaps even in the broader corporate sector.

In fact, if you look at the credit rating reports of some of India's largest (NBFC) MFIs, this is apparent. These reportsv use the presence of a five-star board to claim that governance in these MFIs is very good. Yet, as the last several months have shown, there could be serious governance and related violationsvi as espoused by the following:

(a) The granting of a loan of Rs1.63 crore to the founder of an MFI to enable him to buy 16.36 lakh shares (of Rs10 par value) in the same MFI (Professor Sriram's article in Economic and Political Weekly, 12 June 2010). The most interesting part is that institutional nominees (of domestic financial institutions) were part of the board that made this decision.

(b) The sudden removal of the chief executive officer (CEO) of a large MFI who had just led the company through a spectacularly successful initial public offer (M Rajshekar, The Economic Times, October 2010). Interestingly, the same CEO had received a huge bonus/raise a few months earlier.

(c) Turbocharging growth and the use of (multiple and) over-lending as indicated in the following quotation: "That (following sound lending practices) is where we failed," says Sajeev Viswanathan, CEO of Basix, which is an MFI. MFIs lent liberally to individuals who didn't have the corresponding ability to repay. The mismatch had to hurt sometime...''vii  

(d) Ghost lending and non-existent borrowers, which several MFI financial statements have themselves admitted toviii, including the recent 2011 financial statement of SKS Microfinance (where the auditors claim that frauds due to non-existent clients and clients with false identity run into croresix ).

The cornerstone of this argument is essentially this. Many (NBFC) MFIs engaged in multiple and over-lending for consumption purposes, and they often granted loans without assessing the loan absorption capacity of the clients. Implied in this statement is the fact that these MFIs have pushed loans indiscriminately to low-income clients for consumption purposes without any sensitivity to their debt-servicing ability and they tried to grow (quickly) in this manner and make unnatural profits.

Again, as with the above, it is more and more clear that (NBFC) MFIs (perhaps) tried to grow fast to attract capital at high valuations and, thereafter, had to justify these high valuations by providing better returns to investors. And investors likewise, as they had paid huge premiums, wanted to recover their investment fast and hence, perhaps pushed these MFIs to grow faster.

Hence, as illustrated in the chart below, there appears to have been a mutually reinforcing cycle of multiple/over-lending/ghost lending, fast growth, high profits, very high share valuation, equity investments, faster growth, greater profits, more returns, turbocharged growth, and so on. {break}
And the onus for all of this perhaps lies with the manner in which many of these NBFC MFIs were being governed.

What is really interesting here is that all of this happened despite the concerned (NBFC) MFI boards having so-called strong institutionalx representation on their boards. For example, a senior officer of a development finance institution  was part of the board that sanctioned the loan to the promoter for buying shares in the same (NBFC) MFI. This was also the case with the board that suddenly sacked the CEO of a large MFI after awarding him a huge bonus earlier. Therefore, using board membership as a surrogate for good corporate governance is fraught with danger. I hope that credit rating companies do not continue to use this in the future as the damage created by the use of this inappropriate surrogate is already huge, like the Satyam saga, also illustrated.

"Satyam's five-star board of directors—as onlookers liked to call it—had just the right number of independent directors with just the right credentials, eminent scholars and administrators. Also, Satyam had PricewaterhouseCoopers (one of the big four audit firms) as the statutory auditor. All was well with Satyam's world, or so everyone thought. …Two blows dealt to the company's image within a span of one month ended Satyam's high-prized innocence, the fateful and insane board decision taken on 16th December, 2008,  and then Satyam chairman Mr Ramalinga Raju's confession of false invoicing of 7th January 2009. …Never in the history of corporate India has a company fallen so hard and so fast. And everyone, from investors to experts, attributes this to the failure of the company's corporate governance controls. In fact, all events surrounding the scam (the aborted Maytas bid, the World Bank barring the company from all bank contracts) were being linked to the way Satyam was governed."xi

Now, when one considers the (huge) volume of moneyxii being intermediated by many of the (NBFC) MFIs and given that much of this money comes from the banking system in India (and therefore are in some ways public deposits), corporate governance becomes a very important aspect and in fact that is where the buck really stops. Whether multiple lending, or client harassment, or ghost lending, or coercive recovery, the onus is on the board of directors in MFIs, who are ultimately responsible for all of this and more, as part of their corporate governance role. We need to be clear on that!

In fact, currently there is no serious guiding corporate governance framework for non-listed companies and this includes many of the (NBFC) MFIs as well. The Reserve Bank of India (RBI) circular on corporate governance for NBFCs, although issued in May 2007, is yet to be fully implemented and many provisions (like loans to directors and similar related party transactions) have been kept in abeyance.

Therefore, it becomes absolutely necessary to build safeguards against governance weaknesses and failures, like those described above, and I hope that the RBI, which is preparing detailed guidelines for (NBFC) MFIs based on the Malegam Committee report, and the Ministry of Finance, which is drafting the microfinance bill for all MFIs, do take these critical aspects into consideration.

That said, while it is always easy to provide directives for good governance. But a second issue that must be considered by the concerned authorities is how to ensure the implementation of these guidelines on the ground? That is a very critical aspect and one where the so-called independent directors play a major role. In fact, the very premise of good corporate governance hinges on the ability of independent directors to act impartially, objectively and with prudence, keeping in mind the overall vision of the company and its duty to all of its shareholders.

And sadly, this did not happen in the micro-finance sector in India, as independent directors in many of the (NBFC) MFIs lacked accountability and true independence in their functioning. Some of them were even compensated by way of stock options and the like-instruments that compromise their independent functioning.

Further, as many of them owed their appointments to the promoters/CEOs, this perhaps seriously compromised their ability to function independently. Strangely, even directors nominated by institutional investors were quiet and, sometimes, they did not even write a dissent note when the board norms and procedures were seriously violated. As an aside, it must be noted that the current procedures adopted by institutional investors to ensure the accountability (and effective functioning) of their nominee directors, also appears rather weak. I will not get into the specifics, but there are numerous examples of situations (at MFIs) which could have been salvaged, had the independent (and nominee) directors acted independently and truly in the interest of the (minority) shareholders. The fact of the matter is that the image of microfinance has taken a beating and this could have been avoided, if only the independent directors had acted in a fair and swift manner.

Never mind, and let bygones be bygones. But the RBI which is preparing detailed guidelines for (NBFC) MFIs, and the Ministry of Finance which is in the process of drafting a microfinance bill, would do well to ensure that there are appropriate safeguards to ensure implementation of corporate governance guidelines (in NBFC/other MFIs) as part of the regulatory architecture. That is indeed the first place where regulatory reform for responsible microfinance could begin.

i There are some exceptions, but several MFIs exhibit such characteristics.
ii Like the sudden removal of the CEO of a large MFI who had just led the company through a spectacularly successful IPO (M Rajshekar, The Economic Times, October 2010).
iii Like granting of a huge loan to the founder of the MFI to buy shares in the same MFI, where institutional nominees were part of the board (Professor Sriram's article in Economic and Political Weekly, 12 June 2010).
iv Turbocharging of growth and tweaking of MFI performance through multiple, over-lending and ghost lending to attract equity investment at a premium and build wealth for the promoters, directors, shareholders and so on and so forth (the available evidence seems to suggest this). Several researchers have provided evidence for the presence of multiple lending and MFI financial statements have themselves admitted non-existent clients and  ghost lending.
v While I can quote several examples from these credit rating reports, the idea is not to embarrass anyone and so, I have refrained from quoting these reports.
vi These have been witnessed in some large MFIs, not all of them always.
vii Microfinance: What's wrong with it", by M Rajshekhar, Economic Times Bureau, (11 November 2010).
viii Please refer to the following link for an overview of frauds in microfinance:
ix SKS Microfinance faced 408 cases of cash frauds in FY 2011", by Microfinance Focus, 6 July 2011.
x Small Industries Development Bank of India.
xi The Satyam Saga" by Bhubesh Bhandari, Prashanth Reddy Chintala, Vandana Gombar, Latha Jishnu, Shyamal Majumdar and Aanand Pandey, (2009), Business Standard Publication.
xii We are talking of about Rs20,000 crore and this is no small amount. Also, since much of this money comes from the banking system, these funds are, in many ways, public deposits. Therefore, safeguarding them becomes critical.



KVSubba Rao

5 years ago

Harvard enterpreneurs , desi B-School alumni and poster boys and girls of regulators have made excellent carrers out of India Microfinance Industry. There is no overwhelming body of research to demonstrate that Mfi model has really lifted large populace from out of grinding poverty. The Malegam Committee unequivocally said that an overwhelming segment of Mfi's credit had gone for consumption purposes. Unfortunately our regulators do not mind PSBs and h igh street bankers indiscriminately lending to NINJA(No Income,No Job,No Asset) class through credit cards but any personal loan given to peasants and unorganised sector is roundly classified as consumption credit. Unfortunately, despite a huge Research Dept in RBI with half a dozen CG Ms and God knows how many more junior researchers has not been able do a singular authoritative research study and tell the Fisc that Mfis in the present mode is unworkable. What people under BPL required is free medical aid, subsidised education and santised potable water. A basket weaver, a hawker, a potter with an incremental advance of Rs 5000 or 10000 is not going to be richer. Regulator has to distinguish the line between grant and finance. Lest, his autonomy is in geopardy and BPL people will be consigned to the morass for ever.

Real GDP growth to stabilise at 8.6%: CMIE

The 8.6% real GDP growth forecast is a minor revision from the earlier forecast of 8.7%. The downward revision is essentially in the mining sector, CMIE said

Mumbai: India's real gross domestic product (GDP) is expected to grow by 8.6% this fiscal as compared to a growth of 8.5% recorded in FY10-11, Centre for Monitoring Indian Economy (CMIE) said in its monthly review, reports PTI.

The industrial sector is expected to grow at a faster rate of 8.9% as compared to the 7.9% growth it registered in 2010-11.

Growth of the services sector is projected to scale up to 9.9% as against 9.4% earlier. However, the agricultural sector would see a fall in its growth rate from 6.6% in FY10-11 to 3.2% in FY11-12.

The 8.6% real GDP growth forecast is a minor revision from the earlier forecast of 8.7%. The downward revision is essentially in the mining sector, CMIE said.

2011-12 has got off to a mixed start as the timely onset of the monsoon and its progress through June and early July was good enough to ensure a good harvest. The government has also raised the minimum support prices very substantially to enthuse sowing.

However, industrial production growth rates have been poor during April and May at around 6%. Concerns regarding inflation continue as it has remained at very high levels of around 9%.

Expectations of further interest rate hikes therefore continue to prevail. Data from rating agencies suggest an increase in risk.

The share of non-investment grade paper has risen from 39% in the second half of 2010 to 48.5% in the first half of 2011.

The hike in petroleum prices and reduction in indirect taxes on import of crude oil in June and an expectation of a small fall in the growth in raw material costs, however, have improved the profitability of the corporate sector, it said.

Many infrastructure sectors, such as railway and electricity have recorded good growth rates of 7.4% and 8.4%, respectively. Foreign trade has been very buoyant with growth of 38% in April-May and bank credit growth is robust at over 20% even after 10 occasions of the rate hikes by the Reserve Bank of India (RBI).

CMIE's CapEx database suggest a revival in capex in FY11-12 as nearly Rs8 lakh crore worth of projects are expected to be commissioned during the year.

Most of the projects getting commissioned in FY11-12 are in the power and steel sector. The construction sector will be other big beneficiary of the expected capex boom.

We expected its growth to accelerate from 8.1% in FY10-11 to 10.5% in FY11-12, CMIE said.


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