Banks trim lending to students, fearing high defaults

While banks are taking additional precautions and evaluating more parameters before sanctioning higher education loans this academic year, loans have also turned cheaper. Top ten cheapest loans carry interest rates of 6.75-7.15 percent.

Bank lending to students shrank by almost 6 percent to Rs 63,000 crore in January 2022 from two years earlier, latest data from the Reserve Bank of India showed.

The education loan portfolio of banks fell by 3.7 per cent between 2020 and 2021 and by another 2.4 per cent between 2021 and 2022, the RBI data showed. Education loans were a tad above Rs 67,000 crore in January 2020.

However, the overall personal loan segment grew during this period – by 11.6 percent in January 2022 from a year earlier compared with 8.7 percent growth in the preceding year.

What’s spooking banks? 

Bankers and analysts said a host of factors have triggered caution while lending to students, among them job losses, pay cuts, deaths and other adversities on account of Covid-19. Banks fear these factors will limit the ability of borrowers to honour their repayment commitments.

“Covid has largely impacted the overall education system. Due to Covid, job vacancies have gone down too,” said a senior executive from Bank of Baroda, requesting anonymity. “During such a situation, the sanctioning authority is wary of taking risks as there is a possibility of default in case a student fails to get a proper job.”

Adding to the woes of lenders affected by the disruption caused by the pandemic are the ongoing geopolitical tensions.

The official said the ongoing Russia-Ukraine war may further complicate the situation and there are chances of increased cases of loan defaults by students who returned from Ukraine.

If banks face more loan defaults due to the Russia-Ukraine war, there is a probability that getting an education loan may become more challenging in the future, the official added.

“Banks are specifically fearful of disbursing education loans, particularly small ticket size loans. Considering what happened with students in Ukraine, banks are fearful that there will be a rise in bad loans in the education section,” said another banker who declined to be identified.

Education loans, by nature, are risky because there is no underlying collateral for most such loans, said a senior rating company official.

“Education loans below a certain ticket size can be availed without any collateral and in case of default, the banks face challenges in recoveries. So banks are apprehensive to grow the education loan portfolio in comparison to better risk-adjusted returns from other retail products and thus remain very careful,” said Karan Gupta, director of India Ratings and Research.

Student credit cards

The introduction of student credit cards by various state governments also contributed significantly to the drop in education loans, the BoB official said. State Bank of India, Punjab National Bank, BoB and other public sector banks have signed MoUs with the government under credit guarantee fund schemes for education.

A student credit card is offered to students above 18 years of age at the college level and it does not have an income eligibility limit. These credit cards have lower interest rates with a validity of five years. They were introduced by a few banks recently to ensure that students manage their expenses on their own.

Analysts pointed out that many students chose to defer their courses, especially those opting for education abroad, due to travel bans. Both students and banks contributed significantly to the fall in education loans.

“Many sudden deaths happened during Covid, so banks became extremely cautious in terms of education loans as there was concern over how they would be repaid in case of such deaths,” said Prakash Agarwal, president of financial services at India Ratings and Research.

Prashant A Bhonsle, founder of Kuhoot, an edu-fintech platform, said due to a fall in income in many middle-class families, especially those from the smaller towns, loan applicants failed to meet creditworthiness norms for loans.

NPA increase

Banks have seen an increase in stressed education loans. 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, the ministry data showed.