DMK president M Karunanidhi on Monday slammed the State Bank of India (SBI) for “shaming students and their parents” who had defaulted on education loans by displaying their photographs in banks.
Karunanidhi termed SBI’s action as a “wrong” and said “it is condemnable and defames students”.
He may be right if someone who can’t afford to repay is shamed, but what if they are “wilful” defaulters?
Banks are concerned because the economic slowdown and prevalent high interest rates are pushing up non-performing assets (NPAs) to alarming levels and thenumber of educational loans that are not being paid back is also fairly high as usually there is no security against loans up to Rs 4 lakh.
Also rising interest rates have resulted in higher educational EMIs and this has contributed to the rise in delinquencies.
According to Mint report,6% of student loans outstanding as of 31 March, 2012, had turned bad, up from 2% in March 2008.
While education loans do not constitute a big chunk of the portfolios of banks, a slump in India’s investment climate will force banks to start looking at education loans even more and surely the lending norms are bound to get more stringent.
And in order to force defaulters to repay their loans, banks have adopted a name-and-shame policy, which means they will publish wilful defaulters’ photographs, names, addresses and other details in bank branches as well as local newspapers.
Banks face a problem of rising loan delinquencies. Credit rating agency Crisil last month said that “Credit quality of corporates is likely to be weakened by slow growth in GDP, heightened currency volatility, and higher-than-expected interest rates. Specifically, stress will increase in sectors such as power, construction, engineering, and steel, and lead to higher non-performing assets (NPAs) in the banking system.”
Though the Banking Codes and Standards Board of India (BCSBI)’s code forbids banks from discussing customer debt with a third party, like your neighbour or your boss, banks can publish photos and other details about the customer’s debt at bank branches and newspapers.
Banks can do so because in the terms and conditions of the loan, it is mentioned that in the event of failure to repay the loan, banks, after taking all the necessary recovery steps, have the right to publish the defaulters’ details in newspapers, as per the name and shame policy, to recover their dues.
Of course, one can argue that the “Banking Secrecy Act” should stop them from sharing details of your bank balances with a third party. But this act cannot stop them from publishing your photos in the newspaper, if you are considered a wilful defaulter. The problem is who is a wilful defaulter as opposed to someone who just cannot afford to repay.