Banking Central | Government must not arm twist PSBs on education loans

Last week, media reports suggested that the government was putting pressure on state-run banks to disburse more education loans despite concerns raised by banks over a rising number of defaults. The finance ministry met representatives from all 12 public sector banks (PSBs) to cite the rising complaints of denials in loan sanctions, reports said.

To begin with, the issue is not new as such. Education loans have always been a tricky and painful area for the government-owned banks just like farmer loans on account of the socially sensitive nature and the inevitable political pressure that accompanies such lending. Politicians expect the state-run banks to sanction all education loan requests regardless of their merit and the officer’s judgment on the creditworthiness of the borrower. It is not unusual that local politicians “pay visits” to local branches of PSBs to influence loan decisions that involve indirect threats.

Banks have been hesitant in stepping up lending because of rising defaults in this category. Low-paying jobs and increasing unemployment in the eligible workforce group have added to the pain on educational loans as borrowers are unable to pay back. In March this year, Moneycontrol reported that bank lending to students shrank by almost 6 percent to Rs 63,000 crore in January 2022 from two years earlier, citing data from the Reserve Bank of India.

Why are banks worried? The education loan portfolio of banks fell by 3.7 percent between 2020 and 2021 and by another 2.4 percent between 2021 and 2022, the RBI data showed. Education loans were a tad above Rs 67,000 crore in January 2020. More than 9 percent of education loans issued by public sector banks turned out to be non-performing assets by the end of 2020, according to data from the finance ministry in March 2021. Of the total education loans outstanding, 366,260 accounts worth Rs 8,587 crore had turned bad.

Why are the defaults rising? A major reason, as mentioned above, is students who take high loans aren’t able to secure a high-paying job. Along with this, rising unemployment and pay cuts have added fuel to the fire. This scenario logically strains the financials of the students, resulting in delayed payments or defaults.

It is in this context that banks are raising concerns on the problem areas in education loans and want to be cautious. Education loans, just like any other loans, are business for banks using the depositors’ money. It is not charity or a social welfare scheme. The NPAs (non-performing assets) from these loans are real.

The best judge to decide whether a particular loan proposal is okay or not is the credit officer at the bank. If the Government arm twist banks to give loans that aren’t in agreement with the credit officer’s judgment that is only worsening the existing problem. Bad loans have taken a heavy toll on banking system health already. The buck will ultimately stop with the honest tax payer. The government shouldn’t reignite the problem.