Education loan redesign may overcome banks' reluctance to disburse more

Of the Rs 35 trillion of retaill loans deployed by banks, just Rs 84,375 crore or 2.4 per cent went towards education loans

Education costs have been on the rise in India. For instance, fees at the Indian Institute of Management, Ahmedabad, increased 43.6 per cent between 2016 and 2021. But banks have been reluctant to disburse more education loans to meet the increased costs.

A Business Standard analysis found that the share of education loans in loan disbursal has declined 2.6 times in a decade. The share of credit outstanding for education loans decreased from 6.3 per cent in June 2012 to 2.4 per cent in June 2022.

Of the Rs 35 trillion of retail loan credit outstanding, Rs 84,375 crore went towards education loans. Add lending by non-banking financial companies (NBFCs) to the mix and the total pool is just over Rs 1 trillion.

This share is expected to decline further. Credit outstanding for education loans increased 8.5 per cent in June compared to last year, but the retail loan category grew by 18 per cent. Moreover, while growth in education loans had declined in three of the last five years, the average growth in retail loans was 16.5 per cent per annum.

The government, thus, has good reason to push banks to disburse more education loans. Last month, there were news reports that the government has asked public sector banks not to deny credit on flimsy grounds. They have also been asked to generate awareness about the government’s programmes.

Higher NPAs

One reason for banks’ reluctance has been the higher share of non-performing assets (NPAs) in the category. In March, data from the Reserve Bank of India’s (RBI’s) Financial Stability Report showed that education loans had a ratio of 6.7 per cent compared with 1.8 per cent GNPA for the larger retail loans category. The ratio was higher for public sector banks at 6.8 per cent compared with 5.8 per cent for private banks. Data was not available for NBFCs, but Krishnan Sitaraman, deputy chief ratings officer, CRISIL Ratings, says NBFCs are active in the foreign education segment, and their NPAs may be lower.

“The segment that banks cater to was impacted more during the pandemic and saw higher delinquencies than the NBFCs,” Sitaraman told Business Standard.

Banks’ priorities were changing even before the government’s push for more education loans. A K Das, managing director and chief executive, Bank of India, said the bank is refocusing to grow its education loan business.

Must evolve

However, the lending model needs to evolve, and experts believe the government needs to provide leeway in designing loan products. The model that relies on collateral-based lending has a higher incidence of NPAs, says Sitaraman. Instead, banks can learn from the NBFC model, where borrowers’ cash flows and employability are analysed.

Experts say government support in the form of credit guarantees and interest subventions is much needed, but they also highlight that the current loan limit for treating education loans as priority sector lending needs to be revised upward from Rs 20 lakh, given the surging cost of education.

A “file and forget” approach, experts point out, cannot work in this segment. Thorough assessments and intensive follow-ups are much needed to ensure lower NPAs and higher disbursals.