Not all borrowers are the same. Some are goods borrowers who repay their loans mostly on time. Others do not.

Under typical market operations, the good borrowers get to pay lower rates as compared to the bad ones. This mitigate the risk of default and it discourages too many bad borrowers from borrowing. If everybody pays the same rate, then too many borrowers will likely default. That is happening to the National Higher Education Fund Corporation (PTPTN) in Malaysia, essentially.

PTPTN is having a serious loan recollection problem. As stated earlier, RM22 billion worth of loans have been lent out since 1997 but only 9% of its have been paid back.

Now, here comes something outrageous. PTPTN is waiving loans given to top performing students.[1] The intention is noble and it does provide students with an incentive to perform, provided that they know a waiver is possible.

Unfortunately for PTPTN, good students are likely to be the ones who are good at repaying their loans. I do not have the data to back this up but it is a reasonable assumption to make. Good students excel partly because they have good ethics. They are disciplined given all else the same. Paying back one’s loan is always good ethics. On time repayment requires discipline. Bad students have less discipline and maybe, less ethics as well.

At the same time, good results will likely allow good students to land some good jobs with good wages, which makes them all the more capable of paying back their loans. The same might not be true for the bad ones.

So, if the good students are left off the hook to leave PTPTN with bad borrowers only, then PTPTN will exacerbate its situation.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — TEMERLOH: The National Higher Education Fund Corporation (PTPTN) has written off RM59mil in loans to 2,162 students who obtained Class One Honours from January to July. [PTPTN writes off RM59m loans to top students. The Star. November 24 2010]

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