Education loans hit credit quality of state-run banks

The gross NPA ratio for the education loan segment increased to six per cent in 2011-2012 from two per cent in 2007-08

The surge in education loans offered by state-run banks in the last decade is coming back to haunt the lenders. Some public sector banks have recorded gross non-performing assets as high as 15 per cent in their education loan portfolios, in states like Kerala and Tamil Nadu.

“Having grown at a 35 per cent compound annual growth rate (CAGR) during 2003-04 to 2011-12, education loans are now causing asset quality troubles for public sector banks,” Saikiran Pulavarthi, analyst with Espirito Santo Securities, wrote in his note to clients.

During this period, the sector’s loan growth is estimated around 23 per cent.

STUDY OF BURDEN Education loan portfolio of banks
Banks	Education loan [in Rs crore]	% of net worth	% of total advances
State Bank of Travancore	2,263	58.5	4.1
Indian Bank	3,222	33.4	3.6
Syndicate Bank	2,270	28.2	1.8
Indian Overseas Bank	2,469	24.9	1.8
Andhra Bank	1,516.00	20.3	1.8
Canara Bank	3,948	19.1	1.7
State Bank of Mysore	565	16.6	1.4
Major Banks
State Bank of India	12,566	15	1.4
Punjab National Bank	3,309.00	12.5	1.1
Bank of Baroda	1,872	6.9	0.7
Bank of India	2,193	11.1	0.9
Union Bank of India	1,860	14.2	1.0
Note: Figures are as of March 2012               Source: Espirito Santo Securities

Education loans are typically unsecured. Besides, as starting salaries of students are generally low, the problem is compounded for banks as they face cash flow mismatches.

The gross non-performing asset ratio for the education loan segment increased to six per cent in 2011-2012 from two per cent in 2007-08.

Banks started offering education loan aggressively in 2004-05, when the then finance minister, P Chidambaram, announced several incentives in his Budget speech to promote study loans.

Four southern states – Tamil Nadu, Kerala, Andhra Pradesh, and Karnataka – had close to 56 per cent of the total education loan dues at the end of March 2012.

Most of the south India-based public sector banks have a higher share of education loans in their total credit portfolio.

Education loans accounted for 2.55 per cent of the total credit in the four southern states, compared to the India average of 1.17 per cent in 2011-12.

“Over the last few months, there have been several instances where bankers have expressed concerns on the asset quality of education loan portfolios. Also, according to the Reserve Bank of India (RBI), there has been a sharp increase in the number of consumer grievances regarding denial of education loans in the recent months. The RBI, along with the central and state governments, is working to address both consumers’ and bankers’ concerns regarding education loans,” Pulavarthi noted.

The Centre and state governments have taken steps like interest rate subvention and credit guarantee schemes to ensure better flow of credit to students.

“In our opinion, south based banks — Indian Bank, Indian Overseas Bank, State Bank of Travancore, Andhra Bank, Canara Bank and State Bank of Mysore — will be the biggest beneficiaries owing to the remedial measures initiated by the government,” the analyst said.