High NPAs in education loan segment turn banks cautious

High defaults of about 8 per cent in the education loan portfolio have made banks cautious and go slow on the sanction of such credit.

Non-performing assets (NPAs) in the education loan category including public sector banks' (PSBs) were 7.82 per cent at the end of June quarter of the current financial year. Outstanding education loans were about Rs 80,000 crore at June-end.

Cautious approach is adopted at the end of branches while sanctioning education loans due to high NPAs, a senior public sector bank official said.

As a result some genuine cases are overlooked and there are delays, the official said.

Recently, the finance ministry had called a meeting of PSBs to take stock of the education loan portfolio and cut down on delay. The ministry exhorted banks to spread awareness about the Central Sector Interest Subsidy Scheme among field formations.

The sharp increase in non-performing assets (NPA) in education loans extended by commercial banks in India in recent years is a matter of concern, as it could hamper the growth of bank credit for higher education in the country, according to an occasional paper published by RBI.

In India, around 90 per cent of education loans are disbursed by the PSBs. Private sector banks and regional rural banks (RRBs) accounted for around 7 per cent and 3 per cent of total education loan outstanding, respectively, as at end- March 2020, the paper published in June 2022 said.

The outstanding education loans of all banks were Rs 79,056 crore at the end of March 2020 and at Rs 78,823 crore as of March 2021, as per the Report on Trend and Progress of Banking in India 2020-21 by the RBI. However, the outstanding loans increased to Rs 82,723 crore as of March 25, 2022.

According to Resurgent India managing director, Jyoti Prakash Gadia, fresh job creation has not kept pace with the number of graduates coming out of the colleges, thereby adversely impacting the timely repayment of education loans.

As a result, NPAs have gone up and banks are hesitant to grant fresh education advances, particularly loans up to Rs 7.50 lakh which are without any collateral and third party guarantee, he said.

The effective implementation of the New Education Policy, which lays due emphasis on basic skills development and employability, shall create a win win situation for all the stakeholders, he added.

Most banks offer a scheme for education loan as per the Indian Banks' Association (IBA) model education loan scheme to students pursuing higher studies in India and abroad.

As per this model loan scheme, education loans of up to Rs 4 lakh do not require any collateral to be provided by the borrower, education loans up to Rs 7.5 lakh can be obtained with collateral in the form of suitable third-party guarantee, while education loans above Rs 7.5 lakh require tangible collateral. In all the above cases, co-obligation of parents is necessary.

The second category of education loans are sanctioned to those students who obtain admissions to colleges/universities through management quota, provided they satisfy the minimum marks criteria in the preceding examination.

The third category of education loans includes schemes for needy students for pursuing vocation education courses run by industrial training institutes (ITIs), polytechnics, training partners affiliated to National Skill Development Corporation (NSDC)/sector skill councils, state skill mission/corporation, preferably leading to a certificate/diploma/degree issued by such organisation as per National Skill Qualification Framework (NSQF) and any other institutions recognized by either the central or state education boards or university.

The fourth category of scheme specifically caters to the requirement of students studying in premier institutions like IITs/IIMs/NITs/IISc or courses abroad, with demand for a higher quantum of loan amount. All education loans of up to Rs 10 lakh (enhanced to Rs 20 lakh in September 2020) have been included within the priority sector definition by the Reserve Bank of India.

Under most of these schemes, moratorium period consists of the course period plus six months to one year, and there are nil/negligible processing fees for schemes with high value education loans.

The interest rate under the various schemes consists of a markup of 2-3 per cent above the marginal cost of funds based lending rate (MCLR)/external benchmark, based on the reputation of the course/institutions. The repayment period is in the range of 10-15 years.