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Government Policies Sweeten Student Loans for Commercial Banks

The Chinese government is implementing incentive measures to encourage commercial banks to provide loans to needy students who cannot otherwise afford higher education, according to Chinese government officials in Beijing Tuesday.

Zhang Shaochun, assistant minister of finance, said in a joint press conference held by the Ministry of Education, Ministry of Finance, People's Bank of China and China Banking Regulatory Commission (CBRC), that commercial banks have issued 5.2 billion yuan (some 626.5 million US dollars) of student loans over the past four years, just half of the goal set by the Chinese government.

However, there are still students dropping out of school due to shortage of money, said Zhang Baoqing, Vice Minister of Education.

About 2.4 million students -- 20 percent of the total in higher education institutions in China -- are still facing economic difficulty, while only 830,000 students received student loan in the past four years.

The slow increase of student loans and the commercial banks' unreadiness to provide them, compared with the fast growth of car and housing mortgages, have caused great concern in the Chinese government. "The policy of student loan needs adjustment and improvement," noted Zhang Baoqing.

Wu Xiaoling, vice governor of the People's Bank of China, acknowledged the existence of difficulties in the lending and repayment of student loans.

Wu said the credit system of society has to be improved. The proportion of students who failed to repay the loans in time is high, 20 percent in some areas, she said. The increase of default payment caused greater costs and risks to banks.

Wu went on to say that banks' unwillingness to lend to students is partially due to lack of government compensation for the costs and the risks incurred, which go against the goal of commercial operation.

More over, she said, the banks and colleges are yet to expand the areas and ways of cooperation and coordination.

In a document released recently, the State Council overhauled the student loan policy. The government will now give a greater deal of interest exemption on student loans and allow students to pay back loans over a longer time.

The government has also established a special fund to compensate commercial banks for bad loans lent to students.

The aim of the policy overhaul is to achieve a "win-win" outcome for both colleges and banks, Wu Xiaoling said. She noted that the government will use market forces to implement its student loan policy, adding that the new policy was very popular among commercial banks.

Commercial banks have actively participated in public bids that the government held to recruit providers of student loans, said CBRC Vice Chairman Tang Shuangning. A ministerial coordination panel set the maximum risk compensation rate at 15 percent and accept bids with lower rates. Through intensive bidding, the final compensation rate was set at about 10 percent. Bank of China Limited emerged as the likely winner of the bid.

The government treasury will allocate a risk compensation fund to commercial banks in proportion to the total of student loans actually made, said Zhang Shaochun from the Ministry of Finance. He said if the banks are able to keep the ratio of bad loans below10 percent, they will earn a profit. More importantly, he said banks will have a good opportunity to sell other financial services and increase loans to universities.

Since most of Chinese colleges and universities are troubled by defaults of tuition, the increase of student loans will help them solve this ever worsening problem, said Zhang Baoqing.

To reduce the risk of lending to students, the People's Bank of China will set up two tiers of student loan management centers at both national and provincial levels. Meanwhile, banks and colleges should tighten follow-up measures on student lenders, Vice Governor Wu said.

Though colleges and universities are required to pay 50 percent of the risk compensation fund, the amount that each school has to contribute will depend on how many of its students fail to repay loans in time. This policy is designed to encourage colleges to their students about credit and to strengthen loan management.

Colleges should take more responsibility in the issuing of student loans, said Zhang Baoqing. The government and colleges should be the main body to promote student loans, while the relevant legal framework still needs to be improved, Zhang said.
(Xinhua News Agency September 1, 2004)

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