Education Loans: Shortcoming Of Jobs, Industry Hesitates

Masters degree in any course, any institution is surpassing the level of affordability for majority of the public. If there are no saved sacks of money (not cash, of course) at home, the dream of stepping foot into private educational institutions seems unachievable. The only option spared is getting an education loan from one of the banks.

Education loans advanced by banks have grown by 2.7 per cent in financial year 2017—half as much as the average growth rate of all loans, reports suggest. Increase in tuition fees, emerging private institutions with different revenue models, inflation and increasing cost of other expenses have all led to the growth of education loans.

“It's clear there is great demand. The shift in government focus to primary schooling has resulted in private institutions filling the gap in tertiary education. Secondly, in India and globally, cost of attendance (fees and other expenses) for tertiary education has been rising faster than inflation which is taking it out of reach of the middle class,” shared Ajay Bohora, co-founder and CEO, HDFC Credila with TOI.

The Indian banks were nationalized in 1969 but many argue that the banks failed to benefit all the stakeholders. State-owned banks, which are already weighed down by huge defaults by corporate, are the worst hit as they account for providing over 90 per cent of educational loans. Private Banks have managed to stay away. But with the potential of growing consumers, many specialist lenders and private players have emerged.

“With the increasing need for qualified professionals, higher education has now become a necessity. However, quality education is expensive not only abroad but also in India, making many students depend on Education loans. According to PwC, about 450,000 Indian students spend over USD 13 billion each year in acquiring higher education overseas. According to World Bank, India is a hub for higher education ranking third largest in the world, next to the United States and China. This trend has boosted the education financing sector and continues to do so to meet the increasing demand in FY’17,” shared Amit Gainda, CEO, Avanse Financial Services.

Education Loans: Bad Loans?

In the education segment, the total non-performing assets (NPAs), or loans on which borrowers have defaulted on payments for more than the stipulated 90 days, stood at Rs 6,336 crore at the end of December 2016, against Rs 2,615 crore in March 2013, the Reserve Bank of India (RBI) revealed.

The bankers have pulled back from education loans as the bad loans are high (7-8 per cent) across the segment.

Why the large segment of defaulters? Experts argue that the engineering and management institutions have emerged but the quality of education has not been up to mark. This minimizes the job opportunity prior to the educational phase that directs the consumer into a defaulter. Migration, relocation of students also causes bad loans.

Out of 700 universities in India with numerous affiliated college and 20-30 courses, there are only a handful of them who can promise college placement. With scarcity of employment opportunities, the bankers don’t consider education loans as a good investment. “Apart from the top 10-20 educational institutes offering job placements, there is a huge scarcity of jobs. The bankers have to think twice before lending to a student. And, prior to lending, there is large scale scrutiny and research about the institutes,” shared senior PSU Bank official.

“To minimize bad loans, Avanse Financial Services conducts a detailed evaluation of student’s employability potential and also runs a thorough credit check on the student and the co-borrowers profile prior to the loan approval process. We also highlight the long term repercussions on defaulting on the loans,” added Amit Gainda.

More than half of education loans were taken by applicants in southern states, which have also reported most defaults. Students from Tamil Nadu and Kerala are in the forefront of taking loans, as told by an official of a nationalised bank to The Indian Express.

Consequently, the Government of Kerala launched the Education Loan Repayment Support Scheme on 4 August to help those who are struggling to repay the education loan debts after the completion of their course. It is a loan repayment support/prompt repayment incentive scheme, offered to the youngsters by providing them with government support for a relief period of four years after the repayment holiday.

The government through its various schemes is trying to reach to all the students but its reach is limited too. The banking sector already under pressure can do little to support the students. The market has great potential but the banks are focusing more on higher education in premier institutions like IIMs where both employment opportunities and fees are high. This leaves a large segment of students out of the potential loan inhibitors.