Education loans weakening credit quality of state-run banks

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

"Having grown at a 35% CAGR (compound annual growth rate) 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 industry loan growth is estimated to be around 23%.

Education loans are typically unsecured in nature. Besides, the low starting salaries of students is compounding the problem for banks as the lenders are facing cash flow mismatches.

The gross non-performing asset ratio for the education loan segment increased to 6% in 2011-2012 from 2% in 2007-08.

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

The four southern states – Tamil Nadu, Kerala, Andhra Pradesh, and Karnataka – have close to 56% of the total education loans outstanding in India at the end of March, 2012. Most of the South India-based public sector banks have higher share of education loans in their total credit portfolio.

Education loans accounted for 2.55% of the total credit in the four southern states compared to the India average of 1.17% 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. RBI along with the state and central governments, are working to address both the consumers and bankers concerns regarding education loans," Pulavarthi noted.

The central 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 the 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 due to remedial measures initiated by the government," the analyst said.