The Malaysian government-setup National Higher Education Fund Corporation (PTPTN) is apparently in trouble. It finds itself in a big fiscal hole. With a mandate to provide Malaysian students at local tertiary institutions with cheap source of education financing, PTPTN lends at 1% to students but borrows at much higher rates from financial institutions, according to The Malaysian Insider.[1] If things keep going on its current path, something disastrous ought to happen.
Not only is the rate differential outrageous, borrowers are not paying back their loans. Talk about double whammy. The same report paints a scary picture: since 1997, RM22 billion worth of loans have been made but only 9% of it has been paid back.
PTPTN’s way of doing it is not working. The financial loss if left unmitigated will leave PTPTN unable to fulfill its role in the future. But it is unlikely that the government will let PTPTN fail. So, the whole setup is a recipe for a large bailout in the future.
Before it hits us all in form of yet another government bailout, a solution has to be found.
One solution to this ugly situation is for PTPTN to increase its lending rate above its borrowing rate. No brainer, right? This might create a problem though: if it charges a rate higher than market rates, what would its raison d’être be? Potential borrowers might be better off borrowing directly from the very institutions that PTPTN obtains its loans. But maybe, due to PTPTN’s size and the implicit guarantee it enjoys from the government, it can borrow at a lower cost from the market, as compared to what individual borrower can. That may make a hike not to necessarily remove PTPTN’s purpose.
Even if a hike is only logical, politically, it is very hard for PTPTN to raise its lending rate. The current government will receive a backlash from the hike, especially since the Prime Minister has given signals that the national election might be held soon. Nevertheless, the government has proven that it is willing to increase fuel price. If the government is willing to face voters’ wrath with respect to fuel price, how much larger wrath, with respect to PTPTN, can rate hike be?
Another potential solution is for PTPTN to borrow directly from the government if it has not done so, rather than borrowing directly from the market while relying on explicit or implicit guarantee from the government. The government can typically borrow at a much lower rate than anyone else can in the market. Once the government obtains the funds, the high lords in the Treasury can probably lend a soft loan to PTPTN at a very generous rate. This might lower down the repayment burden of PTPTN by lowering its borrowing cost. This of course works better if PTPTN raises its lending cost as well, assuming collection is not a problem. Having the government involved in this way is really no different from the way it is currently done. If PTPTN fails, the cost will likely be borne by the government anyway. As a result, the level of government intervention is unlikely to change.
The first two solutions have one problem unaddressed however and that is recollection. I do not know why it is a problem. The financial institutions obviously face the same problem but they do not suffer it nearly as badly as PTPTN. Something about government bodies, I guess.
Third possible solution is for the government to provide free tertiary education for those the deserve it. The government will borne all the cost. The repayment comes in the form of higher tax revenue that may come from increased economic activities due to higher average education level of the public in the future. At the moment, given PTPTN’s weak recollection mechanism, PTPTN is effectively giving these former students free money anyway.
The fourth is for the government to cut its potential loss and close down PTPTN. Let that market do it instead. This is my preferred solution, for the obvious reason. Declare PTPTN bankrupt and have the lenders take over PTPTN’s assets and liabilities. They will collect what PTPTN cannot.
[1] — KUALA LUMPUR, Nov 12 — The National Higher Education Fund Corporation’s (PTPTN) practice of borrowing money from financial institutions at higher interest rates to lend to students at very low interest rates has led it to its current deficit crisis.
The Malaysian Insider understands that PTPTN admitted to taking out 10-year loans from financial institutions to bankroll students who then have up to 20 years to repay them when it briefed the Public Accounts Committee on Tuesday. [Interest rates mismatch ails federal students’ loan provider. Yow Hong Chieh. The Malaysian Insider. November 12 2010]