Banking Central | Education loans grapple with rising bad debt

Last week, a banker at a public sector lender told me about a notable deterioration in the asset quality of education loans.

“The trend is worrying,” the official said. “And, surprisingly the defaulters are also from good financial background who have the means to repay loans. But the general idea seems to be that education loans are not to be paid back.”

A few other bankers I subsequently spoke to also seem to agree with this view. Early this year, the government too had acknowledged the problem in education loan division of public sector banks (PSBs). Around 9.55 percent of education loans given by PSBs were categorised as non-performing assets (NPAs) as on 31 December, the government told Parliament in March.

According to government data, as quoted in this Livemint report, fresh bad loans was significantly higher than in 2019-20 and is the highest in the last three financial years. NPAs for education loans stood at 7.61 percent in FY20, 8.29 percent in FY19, and 8.11 percent in FY18.

Why such a sudden rise in education loan NPAs? The most plausible reason for this could be the massive job losses and income losses during the pandemic. There are two types of defaulters. A number of cases where students, in the hope of getting high-paying jobs, have drawn loans but still awaiting their first employment. But, there are also cases where despite getting jobs, the borrowers aren’t willing to pay back purely because of the impression that it is ‘okay’ not to pay back education loans.

This is a problematic trend. Eventually, banks will have to work on risk mitigation measures to address this problem. To be sure, banks’ loan exposure to education has gone down over the year. According to RBI data, Indian banks’ total loan outstanding to education loans stood at Rs 63,437 crore as on September 24, 2021, compared with Rs 65,336 crore in the year-ago period. In other words, on a year-on-year basis the loan exposure has shrunk by about 3 per cent.

Rising unemployment rate is posing major challenges to the banking system as the repayment ability of the borrowers are getting impacted accordingly. According to data from private research firm Centre for Monitoring Indian Economy, the unemployment in October rose to 7.75 percent from a three-month low of 6.86 percent in September.

Rural unemployment jumped to 7.91 percent from 6.06 percent in the previous month, whereas urban joblessness dropped to 7.38 percent from 8.62 percent, the data showed. Banks typically find it tough to deal with education loan defaulters because these loans are politically sensitive. Student loan recoveries attract political attention. Banks, especially, PSU banks, are worried about any such negative publicity and political involvement at local levels. But, the rising stress in the segment shouldn’t be ignored.

It is critical for the government, the majority of shareholders in PSBs, the Reserve Bank of India (RBI) and the bank managements to work together to develop apt risk-mitigation measures to prevent further build-up of stress, before it is too early.

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