The government’s decision to bear a higher burden on education loans is aimed at helping an estimated 1 million students over three years and it could reduce a regional disparity in such advances. However, unless targeted better, more education loans raise the prospect of higher bad debt with public-sector banks (PSBs) that together account for 95% of the market in this segment. The Cabinet on Wednesday approved modifications of the Central Sector Interest Subsidy Scheme — along with the continuation of the Credit Guarantee Fund for Education Loans Scheme — with an outlay of Rs 6,600 crore for three years through 2019-20. At `2,200 crore a year, the outlay represents a 22% hike over the previous three years and much higher than the annual `800 crore between 2009 and 2014, human resource development minister Prakash Javadekar said on Thursday. More loans could help narrow a regional disparity, as just the four southern states account for around 56% of the total education loan portfolio of banks. Among these four, just Tamil Nadu and Kerala together account for 36% of the country’s outstanding education loan portfolio, thanks to high literacy levels.
The overall education portfolio of all lenders in the country is Rs 80,000 crore at present, including Rs 73,000 crore of scheduled commercial banks, Rs 2,000 crore of cooperative banks and Rs 5,000 crore of non-banking financial companies. However, since much of the education loan books of banks comprise advances with a ticket size less than Rs 4 lakh, these loans fall in the category of priority sector lending, apart from being unsecured by nature without any third-party guarantee. As these typically fund low-value general courses, the chances of decent employment of these students are less than those studying professional and technical courses. Consequently, the possibility of these loans turning bad is also high.
Unsurprisingly, the total value of non-performing loans for the public sector banks in the education sector has grown from Rs 3,536 crore in March 2015 to Rs 5,192 crore in March 2017, spiking the bad debt ratio to 7.67% in 2016-17, against 5.70% in 2014-15. Chennai-based Indian Bank had the poorest NPA ratio (18.43%) among state-run banks in this segment in 2016-17, followed by Central Bank of India (16.64%) and Bank of Baroda (16.13%). The average NPA ratio of 18 PSBs was 8.89% at the end of FY17. To cut bad debts in this segment, analysts have suggested mandatory requirement for a third-party guarantee on such loans.
Under the Central Sector Interest Subsidy Scheme, the government will bear the interest cost on education education loans up to Rs 7.50 lakh for students from families with less than Rs 4.5 lakh income. The average loan size has so far been Rs 4 lakh. Under the scheme, full interest subsidy is provided for the education loan taken from banks, covering the period of the course duration plus one year. This is made available to all professional/technical courses. The loans are disbursed without any collateral security and third-party guarantee. The government has said as much as Rs. 9,408.52 crore has been disbursed towards interest subsidy on such loans and 25.10 lakh students have so far benefited since the scheme was introduced in 2009.