Banking Central | Banks fret over surge in education loans and rising layoffs

Education loans are back on the high growth trajectory

Education loans are rising fast, but layoffs are rising faster. In the post-Covid economic downturn, the loans to build career and setback to income are causing a distortion in balance, raising a cause for concern for lenders. Although there is no uptick in bad debt as yet in the education loan segment, it sends out a warning that things could go wrong if the situation persists.

The latest Reserve Bank of India (RBI) data shows bank lending to education grew 23 percent in the 12 months ended January, 2024 to Rs 1.17 lakh crore, making a steep surge from a 15 percent growth in the previous 12 months. The loan outstanding, just two years ago, was estimated at Rs 83,000 crore, indicating that banks have been aggressively ramping up this segment.

A catching-up effect

After a lull during the Covid pandemic, there has been a clear pick-up in the number of students seeking loans to fund higher education, backed by a remarkable surge in the number of students wanting to study abroad and find jobs outside the country. Course fees too escalated after overseas campuses opened with the pandemic retreating. This money obviously come from banks. It’s not just banks, but non-banking finance companies or NBFCs, too are active players in the segment.

A Crisil report last year projected a 35-40 percent growth in education loan assets under management of NBFCs to around Rs 35,000 crore this fiscal, on the back of specialised business models and increase in number of students travelling abroad. This kind of growth projection is based on a sharp deceleration in education loans in the years before the pandemic.

Following a surge in bad loans in the pre-Covid years, banks had slammed the brakes on the segment, slowing down growth in education loan since

March 2016. Accordingly, the share of education loans shrank in the retail lending pie. But, lenders got the whiff of fresh opportunity in this segment in the following years. According to data shared by the government in Parliament, the number of students availing education loans to study abroad increased 215 percent over last 10 years.

Around 4.61 lakh students took educational loans for studying abroad between 2012 and 2022. The number of borrowers trebled over the same period, from 22,200 in 2012-13 to 69,898 in 2021-22. Also, student loans worth Rs 39,268.82 crore were disbursed in the last 10 years, forming more than a third of the total outstanding loans in the education segment.

So, what is wrong with this growth? Education loans are typically considered low-risk loans by banks. But things can change during an economic downturn when job losses and hiring cuts happen. Smaller education loans below Rs 4 lakh do not require any collateral. Loans above that level till Rs 7.5 lakh are given against adequate guarantee. Above Rs 7.5 lakh, banks insist for collaterals. This is the format that banks have been practicing for years.

But, warning signals begin to ring when the job market underperforms and companies turn to laying off employees. If students do not get right jobs even after completing their course or jobs that don't pay enough, repayment takes a hit for obvious reasons. That instantly puts stress on the bank books.

Pink slips on the rise, red alert for lenders 

The current scenario isn't very healthy. In December, 2023, Moneycontrol reported that the year witnessed a whopping 58 percent more layoffs across companies compared to 2022. The report, citing data from layoffs.fyi, said a total of 1,175 tech companies laid off 2,60,509 employees in 2023 as against 1,064 tech companies letting go of 1,64,969 employees in the previous year, marking a 57.8 percent rise on-year.

Among the companies, Amazon sacked the most number of employees this year, letting go over 17,000 professionals, followed by Google at 12,000, Meta at 10,000, and Microsoft at 10,000. In India, Byju’s fired the most number of employees at 3,500 in two rounds, followed by Unacademy at 12 percent of staff, ShareChat at 500, Swiggy at 380, Ola at 200 and Physicswalla at 120. There is a possibility that layoffs may continue in 2024 as well as firms fight a global slowdown and cut costs.

IT companies in India may cut down hiring of engineers by around 40 percent year-on-year in FY24 as they remain wary of the prevailing global outlook, the Economic Times reported citing data from TeamLease.

What does all this mean? Banks’ exuberance in lending to education loans can backfire badly if things don’t go well from this point, thus bringing back the challenges of another NPA wave. Unlike other loans, recovery in education loan segment is also a politically sensitive challenge. There have been several instances where local politicians have intervened when banks have denied education loans or attempted recovery.

How big a systemic challenge this will be for banks?

To be sure, education loans don’t form a big part of total bank loans. As on January, 2024, this segment is only about 0.72 percent of the total bank loans. Yet, at bank level, large slippages from this category can cause a worry as, for some banks, particularly PSUs, this may form a sizeable chunk of their individual credit portfolio. Banks certainly have reasons to exercise caution.

Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.