Failure to repay an education loan may cost you dearly

With banks getting serious about reducing their non-performing assets (NPA), students defaulting on education loans may face serious consequences.

Long-term impact The rising delinquency in education loans is forcing lenders to consider various options to recover their money, including reporting defaulters to the credit information agencies such as Credit Information Bureau India Ltd (CIBIL).

A poor credit rating from these agencies will impact the individual’s credibility and close his/her chances of getting a loan from any financial institution in the future.

According to sources in the industry, public sector banks’ exposure to the segment has crossed ₹60,000 crore. Their delinquency rate has been hovering at around 9.5 per cent, more than double the average NPA rate of 4.5 per cent.

Private sector banks are no exception. In a recent interview with BusinessLine, Shikha Sharma, Managing Director and CEO of Axis Bank, said credit losses were very high in the education loan portfolio and that such loans are “becoming very unviable for us”.

Attributing the trend to the mushrooming of educational institutions unable to offer quality education and their students failing to get placed immediately after passing out, Sharma said the bank was working with institutions to ensure placement.

Stemming the tide A senior official at a public sector bank told BusinessLine that following “an instruction” from the Central Government some time ago, most banks had refrained from sending defaulters’ names to credit information agencies.

“But, as delinquency rises, we are pushing for that. We have approached the Indian Banks’ Association (IBA) to take it up with the Finance Ministry to facilitate reporting to companies such as CIBIL” said the official.

Mohan Jayaraman, Managing Director, Experian Credit Information Company, considers this a positive trend. “Because, it is not just delinquency report; people who are repaying on time also come in our records. This is all about entering the credit system, and it will help them in the long run,” he explained.

“We have a couple of banks reporting to us on their education loan portfolio,” Jayaraman added.

TM Bhasin, Chairman and Managing Director of Indian Bank, said the bank has a total exposure of ₹3,200 crore in this segment, and the delinquency rate is around 8 per cent. The bank proposes to organise awareness campaigns for students in India and abroad to make them realise their responsibility to repay loans once they get employed, he said.

Safety net He also said that public sector banks have collectively asked the IBA to request the Finance Ministry for an increase in the proposed corpus of the Education Credit Guarantee Fund. The earlier Government had proposed to set up the Fund with a corpus of ₹2,500 crore to guarantee education loans ranging from ₹4 lakh to ₹7.5 lakh (loans above ₹7.5 lakh are issued against collateral).

These loans will be guaranteed up to 75 per cent of the amount outstanding with interest as on the date the account is declared a non-performing asset. Since education is one of the priority sectors under which banks are mandated to lend, and the Union Finance Ministry is keeping a close watch on lending by public sector banks under the scheme, the loan portfolio of banks has been steadily increasing.

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