The move assumes significance as it comes at a time when students are suffering because of banks selling a large number of its “bad loans", or loans that have turned non-performing assets or NPAs, to asset reconstruction companies (ARCs), which may charge a higher interest rate in turn.

Bad study loans are a severe problem for banks in Kerala. Out of the Rs10,220 crore total educational loans in the state, Rs1,315 crore is NPA, as per the representative body of all banks in Kerala, State Level Banker’s Consortium. Typically, a bank classifies a loan as an NPA if there has been a default in payment for more than 90 days after the moratorium period.

The initiative is in response to incidents like State Bank Group offloading study loan NPAs to corporates like Reliance ARC, Kerala finance minister Thomas Isaac said over phone. SBI, which is already saddled with bad loans, is under duress as about half of the total loans disbursed in the state were disbursed by them.

Such incidents have become a major stress area for financially backward students who are finding themselves in a debt trap after taking an education loan to pursue higher studies, said Isaac, a development economist-turned-politician.

“This is the first time in India someone is doing this. The hit on us will be huge. We have estimated it will create a burden of Rs900 crore for the government. This year itself the hit will be some Rs600 crore. But we are going to take that hit, and ensure there is repayment," he said.

“(For loans) below Rs4 lakh (NPA study loans), if the banks waive interest and penal interest, 60% will be paid by the government and the rest 40% by the borrower. (For loans) above Rs4 lakh, if the loans have not turned NPA, we have said we are willing to pay upfront the first year up to 90% of the repayment, second year 75%, third year 50% and fourth year 25%. If they have turned into NPAs, they come under different category (secured loans), so the government will offer a package (the details of which haven’t yet been decided) and offer to pay 50% of the total amount," he said.

The initiative is for loans below Rs9 lakh and will benefit families with yearly incomes less than Rs6 lakh (except for people with disability for whom the yearly income slab will be Rs9 lakh). If the student was suffering from physical or mental disability and passed away without repaying the study loan, the government will pay the entire loan amount if the banks write off the total interest amount.

The move is based on official estimates which suggest that the significant amount of study loans turning into NPAs in the state are related to snags within the education system and macroeconomic matters rather than a result of individual repayment alone.

Although Kerala is known for its literacy, previous government reports show the inability of many of the newly sprung private engineering and medical institutions, two most sought-after higher education options in the state, to provide quality education and assure jobs even as their admissions come with a high price tag.

The Kerala high court came down heavily on such institutions in 2012, asking the regulatory authorities to revoke affiliations of colleges where the pass percentage is less than 40%.

“The default loans shows the inability of the students to repay the loan as they are not able to find adequate employment. This throws light on the failure of the institution to equip the students with necessary skills and quality that enable him to compete in the job market or lack of the interest shown by the companies in the campus placement," said a 2015 paper on the subject by Kerala-based think tank, Center for Public Policy Research.

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