Tuesday, February 20, 2007

The problem of funding the poor and meritorious students at - National Institute of Technology, Rourkela, possible solutions: By Sandip K. Dasverma

Due commercialization of education it is usually a problem for the poor and meritorious to defray the expenses needed for NITR. I have been for last few years associated with different organizations, like FFE and Vikas, who offer scholarships. The demand has been found to be more than the supply. This is an evaluation/analysis/ solution based on my experience. I have tried to pen down possible solutions to raise about 40 more financial support to students, which in my opinion will resolve the problems. Various alternatives have been suggested and evaluated.
The loan alternatives will need formation of Self Help Groups to ensure return of the money loaned to ensure perpetuation of loan fund.

Possible solution:
One commonly known and suggested solution is to create a corpus fund for scholarships, which our friend Vallabha has kindly suggested and is in the process of actualizing. (See note)
To do so we need couple of crores. With Fixed interest in India hovering around 6% to give out 10 scholarships @ Rs. 25,000 each, we will need to raise and invest 42 lakhs for one year, to get the 2.5 lakhs needed.
A similar amount will be necessary to be raised every year to continue at level of 10 scholarships per year for 3 more years.
In other words to give 10 scholarships a year / batch would need:
=0.42*4(batches) =1.68 crore in the corpus fund.
Once this 42 lakhs is raised every year for 4 years, ten scholarships can be perpetually given for each admission year and continued for 4 years for each batch.

With present 10 lakh target we will get only 60 thousand to distribute at the end of the year after investment i.e. 3 scholarships of 20 thousand each or 2 scholarships of 30 thousand each only can be awarded.

Alternative 1.
Loan Scholarships:
We assume a similar amount of 42 lakhs are raised and invested in Bank fixed deposits. The interest earned is given out to students as loans. They will pay an interest equal to SBI interest rate on this loan. (or fixed deposit rate plus 3%, which ever is lower, to cover for inflation and default due to death / disability.)
Here also for the 1st, 4 years(@42 lakhs every year(a total of 1.68 crores have to be raised) but after first 4 batches, they will perpetuate. No further fund raising will be required.
However from the 5th year additional 10 scholarships can be awarded from money paid back, by graduated students. Thus every 4 years ten (10) additional loan scholarships can be started, without raising additional funds.

With the present 10 lakh target corpus fund, being raised at the initiative of vallabha and friends, we can afford only 3, 20 thou loan scholarships every year, from 2nd year of raising the funds.

Alternative 2:
With much less money(for example the 10 laksh being raised) we can ensure that 10 students, get money they need. This is by either using methods in option 1 or option 2, described below:

Option 1:
In this option the loans will be from commercial banks, only securitized by the Alumni Association corpus fund. We raise only 10 lakhs corpus fund and use the interest (Rs. 60 thou) of the fund to give security to the bank loan by buying insurance for the banks loans. ( I am forwarding this proposal to some banker friends of mine to get their inputs as to what is the constraint on this, I am sure Rs. 6 thou will be sufficient to insure each student’s life insurance for Rs. 25000, and loan insurance for death or disability / unemployment.)

Option 2:
In this option the loans will be from commercial banks, only securitized by the Alumni Association corpus fund. This method based on corpus fund Alumni association just issues a security of an amount of up to Rs. 25 thou of loan for each student from bank. This way 10 lakhs can be utilized to ensure a total of 40 scholarships per year. After one year it will become 42 scholarships and each year the number of scholarships will go up by 2 because the fund value will increase. (probably more than 40 loans can be securitized, it has to be checked with the banks)

Alternative 3:
Sponsored / Named loan scholarships:
• The Alumni Association will accept sponsored loan scholarships from Alumni, in the name of parents or beloved one(XYZ Memorial scholarship).
• Intending Alumni will donate 25 thou each year for 5 years, (alternatively they can also pay equivalent in lump sum at one time to be handled in the same way.)
• Alumni will donate Rs 25 thou for 5 years (one more year to cover the time after graduation the student will take to pay back the loan)
• When such money is received back from the student loan by the Alumni fund it will issue a loan scholarship to a fresh student. The scholarship continues to have the same name as previously by the donor.
• After graduation and landing on a job, each year student will pay back the loan principal and interest, at the prevailing bank student loan rates.
• Student will pay back each year amount of money equal to loan he took each year.
• Thus XYZ memorial scholarship will be perpetuated.
(I personally would prefer to go this alternative to establish two scholarships in the name of my deceased parents)
Alternative 4:
The Alumni Association and NIT authorities together can and should lobby the Banks and the Govt. of Orissa to declare NIT, Rourkela as an Institute of Excellence (like the IIMs and IITs) that IT IS, so all the students qualifying for admission get assured of unsecured Bank loans.

Advantages of alternative methods:
1. Alternative methods both reduce the investment needed (i.e. fund raised) and / or stretch the number of scholarships. When we convert the scholarships to loan scholarships, it increases very fast the number of scholarships, by making the money returnable when student is able to pay, i.e. they start in jobs. It brings a quick rise in number of scholarships.
2. Assured of money for support their ability for the students to work hard, on their future, is greatly enhanced.
3. Usually at the current pay level of an (2007) NIT Alumni, total loan is less than 4 to 5 month’s salary even in the 1st year of working. Thus they can easily repay in 5th years with interest, all money they needed, when they needed. Because they are paying when able and capable. It is recommended that they pay back each year, money they loaned each year in college.
4. In changed family situations of death or disability of key family members, loans can be started in 2nd year or 3rd year or even final year, because loan money is under control of Alumni Association and since college authorities are fully aware of such exigencies, it will come handy with their recommendation.
5. The alternative #3 is very attractive for many but the catch is in the execution. Transparent, efficient execution will really benefit the students.

Notes: I am informed by a banker friend that the fixed interest rates have gone up to 9%, so the figures will be more favorable for now.

A proposal the banks can’t refuse: By Sandip K. Dasverma

For nearly three years me and some of my friends are building a case for, bank loans for the needy and meritorious students of Orissa, in professional colleges. This is to facilitate easing the way for the meritorious and needy students, from lower economic classes, that are trickling up the system ladder. They are from families whose kids are 1st time in the colleges or students whose parents belong to the extreme poor. They are hardy enough to have survived the 90% drop out rate of schools, in spite of extremely deprived family backgrounds. If aided financially these kids go on to earn monthly salaries which are equal to their annual financial aid. They are a very good investment for any Bank.
All public sector banks, including SBI, have on policy accepted that unsecured loans up to 5 lakhs, can be granted, to these first class students.

In practice however this has not happened for various reasons, some of which are discussed below.

A. Two reasons that we have found from personal investigation, are:
1. Graft, i.e. by only subjecting the kids and their families to a run around, an extra documentary price (bribe) can be extracted from the concern parties. However this leads to two unintended consequences for the banks.
a. The needy don’t get the loan they need, in a timely manner.
i. A few give up their studies.
ii. Most pay the extortion money from the money they borrow, since they don’t have resources to pay the bank personal.
iii. Thus bitter they make up their mind to punish the extortionists by not paying back the money.
2. Past history:
a. It has been found that some students after taking loan for study default in paying back the loans. This has been highlighted by the 1st category officers above to justify their harassment.
b. A few kids from better off families take loan, (not paying bribe but due to the influence of their family and friends), to have ‘fun’ in the college. They take the money aware that they don’t need the money but also aware that using their influence they can avoid paying the money back.
c. SBI and other public sector banks have in case of defaults end up holding responsible personally, the managers of the branches sanctioning these loans, per commercial practice.
d. Faced with the situation honest bank managers have started to avoid granting such study loans, altogether or have insisted on property security.
e. The real poor have thus only two ways left for them:
i. To find a relative to pitch in and provide the security.
ii. Just give up the hope of higher studies after trying for a few months or bribe their way out of the jam. And many don’t have even money to pay the bribe. They pay bribe from the loaned money and are so bitter, that they are very reluctant to pay back the money to the bank.

Thus the ‘unsecured’ loan for meritorious and poor students have fallen by the way side. This has devastated impoverished states like Orissa, where first kid in the college in many economically backward families and in backward areas, are reaching colleges.

B. Basic philosophy in promoting bank loan are:
• Students spend their time in studying and not waste their time to run to the banks.
• If they are admitted to, say NIT, and evaluated to have financial need, as per a standard, they are ensured loan.
• They pay back when they get job. If they don’t, market interest are charged to them rather than the subsidized student loan rates. These days good students, who go to good Engineering colleges, are getting jobs even before they leave college.
• They pay back the bank loan money as soon as they are capable, so the fund grows.

C. How too prevent default and reduce risks of student loans to SBI, some ideas:
1. Self Help Groups (SHG ) of the loanee students are formed from 1st year onwards, who are expected to persuade the graduating student to return the money – so they can get loan (using the general principles of SHG). All four class SHGs meet in the college every quarter to share experience and discuss difficulties, with the local Bank managers and student deans.
2. Since the graduating class and next junior class students are in the college at the same time, they will have enough clout to persuade their seniors, to return loan.
3. The SBI or other banks, which have a collection department, only need to get the address of the graduated students to ensure recovery. This can be easily ensured by the above non-traditional channels to reduce the risks involved.
4. Additionally, the students come one year later for the degree and convocation function. If college authorities can be kept in the loop, to extend any help necessary in this regard.
5. Most importantly, the seniors who help the juniors, providing contacts and network for jobs/employment, can and will also help pressurize, the less than one in 100, who default.
6. Civil society members and eminent persons like the FFE facilitators can ensure that banks will get the addresses of the students, after they graduate.
7. Start it at a few eminent colleges like NIT, Rourkela and test the operations, then fine tune and move them to other colleges later.

D. What Banks can do to improve their public images and eradicate genuine grievances, and to help the needy while only following their avowed policy of giving Unsecured Loans:
They can take a few very simple steps to avoid administrative hassles and improve transparency:

1. Every year publish a budget their target of lone they want to sanction, on their web site.
a. With security
b. Without security.

2. Between September and March publish every month on web site, the progress:
a. Number of Applicants
i. For secured loans
ii. For unsecured loans

b. Ask each branch to publish their own list of:
i. Unsecured loans granted
ii. Secured loans granted.
iii. Number of pending applications

c. Publicly display at each bank branch:
i. a list of names of loans status in each category, as in item b (above), which can be seen by public, similar to documents for public view per provisions of Right to Information Act.

3. Declare a few eminent institutes of the state as institutes of Excellence, (which they really are) and qualify anyone admitted there for bank loans, such as:
a. NIT, Rourkela, (unsecured loan of up to 1.2 lakhs in 4 years)
b. UCE, Burla, (unsecured loan of up to 1.2 lakhs in 4 years)
c. IGIT, Samal, (unsecured loan of up to 1.2 lakhs in 4 years)
d. CET, Bhubaneswar, (unsecured loan of up to 1.2 lakhs in 4 years)
e. SCBMCollege, Cuttack, (unsecured loan of up to 1.5 lakhs in 5 years)
f. VSSMCollege, Burla (unsecured loan of up to 1.5 lakhs in 5 years)
g. MKCGMCollege, Berhampore,(unsecured loan, 1.5 lakhs in 5 years)
h. Ravenshaw College, Cuttack, (Unsecured loan to Rs. 10 thou per year to maximum Rs. 40 thousand)
i. BJB College, BBSR, (Unsecured loan to Rs. 10 thou per year to maximum Rs. 40 thousand)

Lastly, the Alumni Associations of each of these institutes could activate themselves and assist to resolve these issues that have emerged due commercialization of Education. Cost of education have risen beyond the resources of the society for which, this education is meant.
The Alumni Associations have to step in support of the poor and meritorious students and to facilitate the sanction of bank loans.