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Fostering Human Capital for a $20 Trillion India:
What Can and Should Banks Do?
M R Das[1]
Contextualization
The art of economy building is changing. Finance is no longer the ‘engine’ of growth; instead high-end human capital has emerged as the driver of ‘finance’ by facilitating its optimal use. In a knowledge-intensive milieu, countries with comfortable capital cannot make desired macro- or micro-economic headway unless complemented with appropriate human talent and skill (e.g., Middle East). In advanced economies, the economic growth frontier has been shaped equally by both physical and human capital.
Fundamentally, building high-end human capital necessitates a robust system for higher education and skill development without which the likely benefits of ‘demographic dividend’ will be elusive. Therefore, we perceive that in order to build a $20 trillion economy – sustainably and equitably - what India needs the most is enrichment of its human capital, which is still grossly inadequate.
In this paper, we envision how banks, traditionally hailed as “agents of change”, can be inspired to become a pivot for building and enriching high-end human capital to sustain a $20 trillion economy.
Against the above-mentioned backdrop, the paper is structured as follows: Section I addresses the fundamental issue of why should banks be drawn into the education sector when the State is mandated to develop it? Section 2 dwells upon the role of banks in providing higher education loans; Section 3 focuses on cross-country experiences to draw lessons for India; Section 4 enunciates some practical policies to augment banks’ role in fortifying skill and talent; and Section 5 concludes.
Besides own experience in two big banks as Senior Economist for over 3 decades, the paper basically builds on secondary data from publicly available authentic sources.
Section I. Why Banks: A Supply-Demand Analysis
Higher education in this paper is meant to encompass education from college level and beyond including general, professional and technical education. Higher education effects metabolic transformation, in a positive way, in one’s perceptions about changes occurring around her/him. S/he starts viewing things analytically, weighing both ‘pros’ and ‘cons’. Further, it imparts skill, which coupled with analytical capability, makes her/him more employable in all-inclusive way not only for her/his own benefit but also the society’s benefit.
Higher education is the joint responsibility of both the Centre and States. According to the Ministry of Human Resource Development, the number of universities, institutions of national importance and the like increased from 20 in 1950 to 712 in 2014, with the State government universities dominating. The number of colleges increased from 500 to 36,671 over the same period.
We evaluate the current status of our higher education from 4 angles: (a) Demand, (b) Availability and regional balance, (c) Quality and (d) Cost.
Demand
Demand for higher education is increasing phenomenally. Besides, there is noticeable structural change in demand. A variety of factors including demographic, economic, technological, social and psychological has contributed to this.
Increased per capita income, coupled with smaller family size, has enabled parents to afford better and higher education for their children.
Today, employers prefer potential employees with many more qualifications or specialized skills like MBA, specialization in financial management, computer literacy, etc. Therefore, the students have to go for these higher courses.
Today, the public sector jobs are limited. The private sector, comprising several MNCs, looks for varied qualifications, skills and talent in a person. Hence, one has to invest in enhancing capabilities in order to begin a good professional career. Further, career conscious employees have to pursue advanced courses while working.
The youth psychology has transformed. They want to earn as much as possible within the shortest possible time to attain a good standard of living and recognition in the society because job span in the private sector is uncertain.
There have been structural changes in the Indian economy with the service sector coming to the forefront, aided by technology. Many new lines of activities like media, IT, banking and finance, and real estate have emerged which require skill and analytical expertise and the employers prefer those with prior exposure.
Another noteworthy trend is that increasing number of students want to go abroad for higher studies because they do not find education qualitatively good here. Besides, as per a recent British Council study[2], in India, a foreign degree enhances one’s employability. In 2012, there were 1,89,472 Indians studying abroad for higher education constituting 5.5% of the world total, with outbound mobility ratio at 0.7 (UNESCO Institute for Statistics) and registering a CAGR of 10% during 1999-2012. (Chart 1 illustrates the trend). Further, 2002 onwards, India steadily occupies the second position next to China.
Source: http://www.uis.unesco.org/
Availability and Disparity
As at end-March 2013, on an average, 1 university served 2,11,210 in the age-group of 18-23 with wide regional variations (Range: 5,30,877 - 13,362 ). Nearly three-fourth of the universities were in 13/30 States - 11 belonging to 3 regions, namely, North, South and West. A similar pattern is obtained for colleges.
The Central, Eastern and North-Eastern regions are much deprived. Therefore, students from these regions migrate to universities/colleges outside their home States adding to their cost of education, besides precipitating ‘brain drain’ from these areas.
As Economic Survey (2014-15) candidly observes “…institutions of higher education are notoriously inadequate” (Volume I, pp.5).
Quality
Domestic ranking of universities and colleges by National Assessment and Accreditation Council reveals that out of 179/630 universities accredited, 70 belong to ‘A’ Grade, 103 to ‘B’ and 6 to ‘C’. The corresponding grades for 5,224/33,000 colleges accredited are 554 - ‘A’, 3,697 - ‘B’ and 973 - ‘C’.
Insofar as global ranking is concerned, the scores of Indian universities are pathetic. According to Times Higher Education magazine’s World University Rankings 2014-15, India has only 4 universities/institutes in top 400, whereas China has 11. In its BRICS & Emerging Economies Rankings 2015 Top 100, India has 11 universities as against China (27) and Taiwan (19). In its Asia University Rankings 2014 Top 100, as against 20, 18 and 14 universities from Japan, China and Republic of Korea respectively, only 10 universities from India find mention. A UNESCO report covering 11 Asian countries paints a similar picture.[3]
As percentage of GDP, India’s R&D expenditure at 0.81 (2011) is woefully low compared to many Emerging Market and Developing Countries (EMDCs), e.g., Brazil (1.21), China (1.84), Hungary (1.22), Israel (3.97), Republic of Korea (4.04), Russian Federation (1.09) and Turkey (0.86).
Affordability
Government Expenditure
Higher the government expenditure (Centre + States) on education, lower should be the burden on students. In India, the government expenditure on the entire education sector remains low. Between 2003-04 and 2012-13, total expenditure on education by Education & Other Departments (Centre + States) as proportion of GDP hovered around 3.3-4.3%, with most of the times remaining below 4%. And, on higher education it was further low in the range of 0.67 to 0.89% between 2005-06 and 2012-13. Charts 2 and 3 illustrate these trends.
Source: http://mhrd.gov.in/higher_education
Source: ibid.
We also compared India with a select 15 of EMDCs in respect of 4 parameters and the results are summarized in Table 1.
Table 1: Government Expenditure on Education:
International Comparison
Parameters / Position from Top / Value1. Government Expenditure as % of GDP / 10 / 3.8
2. Government Expenditure as % of Total Expenditure / 9 / 12.9
3. Expenditure on Tertiary Education as % of Government Expenditure on Education / 2 / 33.2
4. Per Tertiary Student (Constant USD) / 14 / 828.3
Source: http://www.uis.unesco.org/
Except in respect of the No.3 parameter, in all others, India’s rank was far from satisfactory.
The role of the private sector in the form of own set-ups and/or collaborations with the governments is minimal. In addition, private institutions charge exorbitant rates and on various inexplicable heads. Incidence of fraudulent institutions in the private sector is not uncommon and teaching standards are many a time below par.
Inflation
Even when judged against the limited way ‘Education’ is factored in into Consumer Price Index and/or Consumer Price Index for Industrial Workers, Education inflation has several times surpassed General inflation. Moreover, Education inflation is more downwardly sticky than General inflation. Thirdly, Education inflation pervades even the lower tier places, besides metros.
Section 2: Education Loans by Commercial Banks –
An In-depth Analysis
The origin of Education Loan (hereafter EL) scheme in India by banks can be traced back to the pre-Nationalization period. Education as a significant contributor to nation building was weaved into the measures for social control over banks, which were initiated by the Government of India in 1967-68 and became formally effective in February 1969. As at June-end 1969, there were 1,477 EL accounts with Rs.4.6 million outstanding.
The scheme thenceforth has evolved through contributions from the Ministries of Human Resource Development and Finance, RBI, Indian Banks’ Association (IBA) and banks. IBA’s original Model Educational Loan Scheme of 2001 has been revised over time and the latest improvements date back to September 2012.
Brief Literature Review
As far as research-oriented studies on EL by banks is concerned, it is virtually a virgin area. Most of the studies relate to government loans. Some of these studies did not even favour commercial bank loans for higher education on many grounds.[4] It could be because commercial banks entered into the field of financing education, in an effective way, rather late and the penetration has not hitherto been adequately wide and deep. There are a few area-specific sample studies which look into the socio-economic facets of the student-borrowers,[5] rather than how banks can use the EL route to help build high-end human resources. Further, no study is yet available, in the public domain, on the Non-performing Assets (NPA) issue in EL. This study is an attempt to bridge these gaps.
EL provides financial support to meritorious students who want to pursue higher education in India and abroad. Besides the basic Scheme, EL is also available for niche segments such as vocational, skill development, training, etc., courses.
Analysis
The analysis has been carried out at 2 levels: (a) for all EL and (b) for those EL included in Priority Sector Loans (PSL).
All EL
Data in respect of all EL, available for the period March-end 2005 to February-end 2015, were sourced from RBI Data Warehouse. Table 2 presents the amount outstanding in respect of EL, Non-food Loans (NFL) and Personal Loan (PL), of which EL is a constituent.
Table 2: EL, NFL and PL – Amount Outstanding and CAGRs
(Rs. billion)
Source: http://dbie.rbi.org.in/
All the three types of loans grew at rapid rates. EL registered the highest CAGR. As at end-February 2015 (latest data available), EL stood at Rs.635 billion, up by 5.5% over the level at end-February 2014.
Chart 4 illustrates the movement of EL as proportion of NFL and PL over time.
*Up to February. Source: ibid.
EL/PL ratio rose almost steadily from 2.2% in 2005 to a peak of 6.4% in 2012, i.e., it multiplied almost 3 times, but it fell by 3 percentage points each in the next 2 years. In 2014-15 (up to February), the fall accelerated.
EL/NFL ratio rose rather tardily, doubling in 2010 over that in 2005 and staying at that level for next 2 years. Thereafter it declined to 1.1% and remained at that level up to February 2015.
Chart 5 presents the incremental ratios over time.
Source: ibid. Computation ours.
The ratio of year-on-year increase in EL to that in PL rose at a fast rate initially and reached a peak of almost 36% in 2010, reflecting initial ‘irrational exuberance’, but thereafter it crashed. Similarly, the ratio of yearly incremental EL to NFL increased initially, though not as rapidly as the corresponding EL/PL ratio, but remained subdued and fell below 1% 2013 onwards.
In a word, EL/NFL and EL/PL ratios have been, by and large, on a downhill since 2011. The major reason is banks’ reluctance to lend for Education, since repayment faltered.
At March-end 2013, EL penetration and density ratios[6] were estimated to be 1.9% and Rs.3,916 respectively which were very low.
EL in PSL
As already stated, EL has been included under PSL since 1969. Following the recommendations of an RBI Internal Working Group on Priority Sector Lending [Chairman: C S Murthy (2007)], EL to individuals, including vocational courses up to Rs.1 million for studies in India and Rs.2 million for studies abroad, came to be included under PSL from 2008 onwards.
Charts 6 to 11 present a vivid analysis of EL vis-à-vis PSL in respect of Public Sector Banks (PSBs).
PSBs: ELPSBs: Share of EL in PSL
PSBs: EL: Average per Account (Rs.)
Source: http://www.indiabudget.nic.in/ and http://dbie.rbi.org.in/
Number of accounts and amount outstanding: During 1969-88, both the number of accounts and amount increased sharply from 1979 onwards. For the entire period, CAGRs were 25.2% and 24.2% in terms of number of accounts and amount respectively. During 1990-2014, both rose sharply from 2005 onwards. Over the entire period, CAGRs were 16% (number of accounts) and 32.3% (amount).
Share in PSL: During 1969-88, the share of EL, both in terms of number of accounts and amount, fell sharply from June 1972 onwards from their peaks in the previous year and remained below the peaks thereafter. During 1990-2014, both number of accounts and amount increased from the outset, but sharply from March 2002 onwards. Both remained much above 4% from March 2010 onwards. However, 2013 onwards, deceleration in both set in with the EL/PSL ratio in terms of amount plunging below 4%.
Per Account Loan: During 1969-88, average amount of loan per account initially fell up to 1978 but thereafter increased almost steadily. During 1990-2014, the average showed a consistently upward movement right from 1990 onwards.
Bank Group-wise Analysis
Chart 12 presents the shares of State Bank Group (SBG), Nationalized Banks (NBs) and Private Banks (PVTBs) in terms of number of accounts and amount as obtained at March-end 2014.
Inner/Outer circle: Number of Accounts/Amount. Source: ibid.
The participation of private banks was minimal, whereas the performance of SBG was laudable.