Non-banking financial companies (NBFCs) will witness education loans, primarily those to fund courses overseas, among the fastest-growing segments because of rising demand for higher education, stated a report by CRISIL Ratings. After reporting a growth of over 80 per cent and 70 per cent in fiscals 2023 and 2024, respectively, NBFCs’ education loan assets under management (AUM) rose to around Rs 43,000 crore as on March 31, 2024. Their AUM is expected to further grow at a healthy clip of 40-45 per cent to cross Rs 60,000 crore this fiscal, it added.
On the asset quality front, metrics should remain stable despite country-specific concerns, stated the CRISIL Ratings analysis.
“The number of Indian students studying abroad is estimated to have doubled in the past five years to around 13.4 lakh as of last fiscal. Only a tenth are being funded by these NBFCs, and even including education loans by banks, the financed quantum is not much higher. What that indicates is that a large portion of overseas education is being funded through alternative means — informal financing, self-funding, or perhaps other forms of loans. That shows education loan companies have significant headroom for growth. Rising ticket sizes because of ascending tuition fees, inflation and living expenses are also tailwinds,” said Ajit Velonie, Senior Director, CRISIL Ratings.
What has helped NBFCs to carve out a niche in the education loans space is strong micro-market intelligence and fast turnaround times. Their specialised business model — backed by strong understanding of relevant geographies, courses, universities, tenures and profiles of students and their families — affords customisation of products, enabling better assessment of employability and risk-adjusted pricing, CRISIL said.
The portfolio performance of these NBFCs have been resilient so far based on strong credit underwriting. Their 90+ days’ past due (dpd), for education loans, was around 0.2 per cent as on March 31, 2024, whereas for private and public sector banks, gross non-performing assets were 2.0 per cent and 3.9 per cent, respectively. Peak quarterly delinquency on the vintage pool of 90+ dpd for NBFCs was also below 1 per cent.
“Additionally, prepayment and foreclosure rates are high — 35-45 per cent of the loans get prepaid during the initial moratorium period of typically 3 years. And most of the loans are repaid in 5-7 years even where the contractual tenure is higher. However, given the recent high growth, around 90% of the portfolio is currently under moratorium. So, asset quality performance over the longer term remains to be seen,” said Malvika Bhotika, Director, CRISIL Ratings.
Nevertheless, CRISIL added, these NBFCs have shown agility in navigating country-specific concerns. For instance, while the US, the UK and Canada are preferred destinations, NBFCs have reduced exposure to Indian students studying in Canada to approximately 15 per cent as on March 31, 2024, from around 21 per cent two years ago. This has been in response to changes in the regulatory and operating environment there.
That said, healthy capitalisation supported by investor interest has backed the credit risk profile and growth of these NBFCs. “Their ability to continue growing while maintaining asset quality — even as a higher portion of the portfolio comes out of moratorium amid the evolving global macro environment — will bear watching,” CRISIL concluded.