Credit offtake has risen sharply post-Covid with most loan categories seeing growth, except education loans. Though there’s strong appetite for these loans, bankers seem reluctant to lend. Reserve Bank of India data show that in July 2022, banks had just ₹85,098 crore of education loans in a mammoth ₹35.9 lakh crore retail credit book. A key reason for this seems to be banks’ fear of delinquencies. As of March 2022, banks carried Non-Performing Assets (NPAs) of just 1.8 per cent on their retail loan portfolios but education loan NPAs were markedly higher at 6.7 per cent. . Higher education is today a key aspiration for India’s lower- and middle-income households and the skilling of youngsters is critical for the country’s demographic dividend to play out. Bankers and policymakers therefore need to delve into the root causes for stagnating education loans, and address them.
To start with, accessing education loans from formal sources remains an uphill task for students from less affluent backgrounds. Yes, RBI offers the priority sector tag for all education loans below ₹20 lakh and the Centre provides an interest subsidy during moratorium to students from low-incomes households. But these sops do not make up for the high access barriers to education loans in the form of demand for collateral. Most banks extend education loans under the IBA model where loans below ₹4 lakh do not require any collateral, but those up to ₹7.5 lakh require third-party guarantee and loans above ₹7.5 lakh require tangible collateral. The sky-rocketing cost of higher education has made sure that these thresholds are quite inadequate today. The short moratorium period of just 6 months to one year also poses a challenge as the employability of most students passing out of private engineering/medical colleges and technical institutes remains a question mark. Given the low packages at which most students get placed, the mark-up of 2-3 percentage points over MCLR at which student loans are priced acts as a barrier too. To make education loans more affordable and accessible, banks may need to tweak their product design to offer lower EMIs, perhaps with longer moratoriums and repayment periods. Products such as income contingency loans popular in developed markets, which set a minimum EMI but allow the student to vary instalments based on earnings ability, can be explored.
Bankers also need to rethink their approach to evaluating loan applicants. While banks focus on the parents’ credit-worthiness, CIBIL score and ability to provide collateral to approve student loans, specialised NBFCs in this space have achieved better outcomes by focussing on the student’s academic record, the quality of her college and course, and placement prospects. Yes, PSBs are hamstrung by small-ticket loans to lower-income households that dominate their books. Here, collecting more KYC details at the outset and more frequent follow-ups after disbursal may help improve the repayment record. An RBI study of student loan defaults published in December 2020 points out that the incidence of default on Aadhaar-linked education loans was much lower than those without these basic details.