Education loans, once a darling of Indian banks, aren't growing on their books for the last few years. In fact, the exposure has been declining. The outstanding loans, as on November, 2019, fell to Rs 66,902 crore compared with Rs 71,975 crore in September, 2017. On a year-on-year basis, banks’ education loan portfolio has shrunk by 3.5 percent in the twelve months to November, 2019. In absolute terms, the amount is not very big.
Nevertheless, the trend offers some insights to the state of the economy. There was a time when banks used to compete to grow their student loan portfolio, often running campaigns. What changed over the last few years? Of course, banks cut lending when demand slows or when bad loans from that particular segment begin to spike. In the case of education loans too, both aspects seem to have played a part.
Banks have turned extra cautious to avoid fresh NPAs, said a senior banker on condition of anonymity.
"Earlier there was pressure on banks to keep increasing the education loan portfolio. Now that pressure is not there and banks are taking decision based on merit," said the banker. But even then, that's only one side of the story.
A slowing economy
The most plausible explanation for the fall of study loans is its direct link with the economy and job market. When students borrow huge loans from banks to pay up their professional course fees and find it hard to get employment opportunities thereafter, repayments suffer. In India, till about Rs 4 lakh loans, banks cannot ask for collateral from students.
Above Rs 4 lakhs and till Rs 7.5 lakh, lenders can insist for a personal guarantee and for loans above that some sort of collateral. But all these rules are negotiable depending on the quantum of money and local political involvement. Banks typically don't say no to a student loan fearing political backlash. This structure makes it extremely difficult for banks to recover loans if the loan turns into NPA.
The consensus among bankers is that most defaults happen in loans that are lent to low-paying jobs, say nursing courses where salary levels too low. It becomes difficult for students to earn enough to spend for personal needs and find money to pay back to banks. One fifth of the NPAs (non-performing assets) come from loans to nursing courses, followed by engineering courses. Going by industry data, the NPA in education sector jumped to 8.97 percent at the end of March 2018, as compared with 7.29 percent in March 2016. Bad loans of PSBs in education sector stood at 5.70 percent in March 2015, according to official data. These are mostly on the books of public sector banks.
No jobs, no money to repay
With unemployment at 45-year high and economy slowing every passing quarter, NPAs from this segment are likely to rise further.
"One reason for NPAs going up is that employment scenario is getting bad. There are no jobs for students completing courses paying high fees. That leads to defaults and makes banks extra cautious," said Madan Sabnavis, economist at CARE rating agency.
According to CMIE's Mahesh Vyas, the unemployment rate rose to 7.5 percent during September-December 2019, marking the seventh consecutive round of surveys to record an increase in the unemployment rate since May-August 2017 when the unemployment rate was 3.8 per cent.
Besides the lack of employment opportunities in the domestic market, changes in visa rules and the new wave of protectionism across developed countries too have cut the influx of students to countries like US. A third reason could be that less number of students are enrolling for engineering courses.
A Business Standard report recently pointed out that the enrolment in engineering courses in Indian colleges and universities declined from 4.25 million in 2014-15 to 3.77 million in 2018-19. The trend of rising bad assets from student debts is not unique to Indian market. Globally, banks are witnessing pain in their study loans portfolio.
The question is this: when the economy doesn't offer students enough employment opportunities, who should be paying up their unpaid debt? One argument is if the government is willing to waive off debt of stressed farmers every now and then, it should also do the same for students in a bad economy. Indian banks have collectively waived off Rs 3.14 lakh crores of farm loans in the last decade. That excludes the Maharashtra debt scheme.
In 2014 interim Budget, the then government announced a scheme under which some 900,000 students were promised a moratorium period for education loans taken up to March 31, 2009, but which remain unpaid by December 31, 2013. This was announced when students found it difficult to get jobs on account of the economic crisis in 2008-09. Right now, there is no global financial crisis but India's economy is in a deep mess resulting in high unemployment. Should the government offer a similar relief to students to help them pay back their debt?