Non-banking financial companies (NBFC) have gained market share at a faster pace than public sector banks (PSBs) in the education loan segment due to their cash flow-based underwriting models, said bankers. In fact, these NBFCs have also been better in managing their asset quality compared with peers.
“NBFCs are gaining market share at the cost of banks due to superior underwriting abilities and better customer experience vis-à-vis what banks provide,” Amit Yadav, chief strategy officer and chief business officer – digital business, Avanse Financial Services, said. “Bank takes a collateral approach to underwriting. They do not differentiate between a good student and a bad student, the college they are going to. They will have some top 40-50 institutes, that is it.”
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To put things in perspective, 4.7% of the total education loans disbursed by State Bank of India
Banks are mandated to meet an education loan disbursement target under Reserve Bank of India’s (RBI) norms on priority sector lending. The RBI’s norms mandate banks to lend 40% of total loans to priority sectors. There are sub targets within the overall 40%.
In September 2020, the RBI increased the threshold for education loan under priority sector lending to Rs 20 lakh from Rs 10 lakh.
Nevertheless, non-bank lenders will continue to hold the edge in the education loan segment considering that banks are unwilling to lend unsecured loans where the ticket size is above Rs 10 lakh.
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On the other hand, non-bank lenders are able to lend higher ticket sizes due to their cash flow-based underwriting approach, said bankers.
“We have complete data on 20-25 countries. So, we are very well prepared and we are in complete control when we give the loan. Also, what we have noticed is that courses costing more end up giving a better job to students,” says Nilanjan Chattoraj, head – credit and product – education loans, InCred said.
“We are not worried about giving a higher exposure because higher loan amount means better quality of college and more probability that they will give the right job at the right time. This is a time-tested model, so none of these NBFCs has a high NPA,” he said.
In fact, NBFC’ delinquency levels in more than Rs 10-lakh loan is 15-20 bps as on September 30. Also, NBFC loans for education rose 20% YoY in July-September.
In recent times, there has been a hike in course prices by domestic institutes. Course prices in foreign universities have now risen due to depreciation in the rupee, and this is only going to play into the hands of NBFCs that can cater to higher ticket sizes, experts said.
Going ahead, NBFCs will continue to make inroads in the education loan segment, a turf that has traditionally belonged to PSBs, bankers said.
“From the bank’s perspective, I do not see NPAs falling drastically unless banks become a specialist in this segment. I do not think banks have the bandwith to become a specialist in this segment,” Chattoraj said. “So, their NPAs may not improve by much. The other manner is for the RBI and the IBA to change the education loan guidelines. I do not see those changing soon.”