Education loan defaults may hurt students' credit score: CIBIL

Pointing to high incidence of defaults in the low-ticket education loans, credit information company CIBIL on Thursday said such default history might adversely affect students’ credit score and their ability to take out other loans in the future.

The overall incidence of delinquency on education loans is around 5 per cent, going by dues of 90 days plus. The default rate for education loans with ticket sizes below Rs 4 lakh is significantly higher (at 8.1 per cent) compared with large-ticket size loans, CIBIL said in a statement. Comparative default rates for other categories are: Rs 4-5 lakh — 4.8 per cent; Rs 5-15 lakh — 2.1 per cent. For loan amounts above Rs 15 lakh, the long-term default rate is under 1 per cent. 

The aggregate credit exposure of education loans in the Indian banking system is around Rs77,000 crore. This is barely 1 per cent of total banking system exposure, and by itself may not present a systemic risk, CIBIL said. However, the importance of such defaults can be seen in two aspects. First, these delinquency trends predict the risk profile of future borrowers who will join the mainstream credit market. Second, they may also be reflective of the potential job opportunities in the industry.

Harshala Chandorkar, chief operating officer (COO), TransUnion CIBIL, said banks needed to focus on sharpening their risk management capabilities while assessing small-ticket education loans. 

A joint loan or a loan guaranteed by a credible guarantor reduces delinquency level significantly. As such, steady underwriting practices will ensure profitable loan growth in this very important education loan segment, Chandorkar said.

Students availing of loan opportunity must understand that it is important to pay back their education loans once they complete studies. 

Defaults on repayments of education loans would reflect in the borrower’s CIBIL Report and might negatively impact his/her CIBIL Score. This could hamper the chances of getting a loan for many more important milestones in the future, Chandorkar said. 

The growth rate in the number of educational loans has shown a flat to downward trend. Yet, the growth in amount disbursed is driven by an increase in average ticket size from around Rs 3.5 lakh (in 2012-13) to Rs 6.5 lakh recently.

CIBIL said big-ticket education loans (Rs15 lakh plus) accounted for close to 60 per cent of the amount disbursed. The share of loans below Rs 4 lakh has fallen to less than 20 per cent of total loan disbursed in the past two years, it said.