Banks’ education loan portfolio grew 11% year-on-year in August, compared to a minuscule growth of 0.3% in the year-ago period, even as concerns are being raised that banks are reluctant to offer educational loans as bad assets in the sector are on the rise.
Total loans outstanding by the banks to the education sector stood at Rs 87,456 crore as of August 31, the latest RBI data show. Although the growth in the educational loans is lagging the overall personal growth segment, the former is quickly catching up. Educational loans in the banking industry grew by 27% in August compared to the pre-pandemic period. In August 2019, the segment outstanding stood at Rs 68,457 crore.
While the credit growth of the retail segment was around 18%, educational loans were growing by around 6-9% in the past few months. However, educational loans have breached the 10% mark after posting contraction in the pandemic period.
The finance ministry has exhorted PSBs to improve lending in the education space as banks were cautious due to rising non-performing assets, recent media reports said. The gross non-performing asset (NPA) ratio of educational books for all banks improved to 6.7% as of March 31, compared to around 7% as of September 30, 2021, as per the Financial Stability Report released by the RBI in June.
While the gross bad loan ratio of education book for PSBs was higher at 6.8% as of March 31, that of private banks was substantially lower at 5.8%, the report said.
Banks, which typically give small-ticket loans in this segment, had reduced their exposure to the domestic education sector during the pandemic as bad loans increased owing to the inability of borrowers to pay back. However, with the revival in the economy, there is an uptick in educational loans as well, Krishnan Sitaraman, senior director and deputy chief ratings officer at Crisil Ratings, said.
Most banks offer a scheme for education loan as per the Indian Banks’ Association (IBA) model education loan scheme to students pursuing higher studies. According to the scheme, education loans of up to Rs 4 lakh do not require any collateral, those up to Rs 7.5 lakh can be obtained with collateral in the form of suitable third-party guarantee, while education loans of above Rs 7.5 lakh require tangible collateral. In all the above cases, co-obligation of parents is necessary. The loans are also categorised as per the field chosen by the student borrower such as premier institutes, vocational courses and management quota. Education loans of up to Rs 20 lakh are included within the priority sector lending definition by the RBI. The moratorium period consists of the course period plus six months to one year, and the repayment period is 10-15 years.
One of the biggest structural challenges for educational loans is the supply of capital for lending, Avinash Kumar, co-founder of education focused non-banking finance company (NBFC) Credenc.com, said, adding that higher average repayment period in the higher education sector is a barrier for lending to the segment. Moreover, to improve education funding, the underwriting model needs a change, as currently it is done on the back of parental income profiles rather than student potential.
Additionally, some of domestic education institutes also offer poor skill-sets to students, impacting their employability, as a result of which many lenders refrain from issuing educational loans, Aditya Damani, CEO of new age NBFC Credit Fair, said.
An RBI research paper shows that Aadhar-based information is crucial for tracking the loan performance and a more flexible payment schedule with longer moratorium could potentially reduce default. The paper also suggests exploring schemes based on future income, although banks may be tempted to disburse loans to courses where there is higher earning potential.