Earlier this month, Muthukumar, 24, from Kayalpattinam, a small town in Tamil Nadu, was granted an education loan for a B.Tech course after a one-year wait.

The Madras High Court directed Indian Oversees Bank to release a loan of ₹93,000 after the bank had rejected his application on the grounds of non-compliance with the documentation process.

In another instance, Puja, a 28-year-old MBA graduate, is struggling to pay her education loan of ₹5 lakh as she has not found a well-paying job.

Puja and Muthukumar’s are no isolated cases. Defaults and lack of proper documents are among factors affecting bank lending to this sector. According to RBI data, the growth in education loans fell to 6.6 per cent in November 2014 from 8.3 per cent in the corresponding month of 2013. It grew by a meagre 4.6 per cent during March-November 2014.

For the banking industry, outstanding education loans stood at ₹62,800 crore as on end-November. It was ₹58,900 crore a year ago (November 2013), and ₹54,400 crore in November 2012.

According to bankers, the increase in education loan defaults due to difficulty in getting jobs, especially after the economic crisis, has restricted lending to students.

“It is a difficult sector as there are lot of delinquencies by students. There is no collateral required up to ₹7.5 lakh. Hence, recovery is an issue,” said a private sector bank official.

However, under Indian Banks’ Association (IBA) guidelines, if a student leaves a course midway or has to extend the course by up to a maximum period of two years, the bank can work out a new repayment schedule.

The delinquency rate in the segment is as high as 12 per cent, much higher than the average non-performing asset ratio of 4.5 per cent.

“Banks are not shying away from lending, but we have particularly lost faith in substandard institutes as they do not lead to jobs,” said TM Bhasin, Chairman and Managing Director of Indian Bank, and Chairman, IBA.

In addition, the demand for education loans for engineering courses (where there was demand earlier) has come down, he said.

Also, loans for studies wanting to pursue education overseas have remained static as the rupee movement has had a negative effect, he added.

The interest rates on education loans range between 11 per cent and 16 per cent. Typically, banks ask the borrowers to provide a co-guarantor, collateral security in the form of any fixed asset, and the income details of the parents or the guarantor at the time of taking a loan.

Banks also look at the employability of the student after completion of the course.

According to Finance Ministry data, in 2013-14, the number of education loan accounts had gone up to 25.72 lakh,with total credit outstanding at ₹58,265 crore.

Related Topics
comment COMMENT NOW