Securing an education loan for the upcoming academic session is set to be a difficult task, with several banks not keen on lending to students owing to a large number of defaults. The default rate, credit experts said, is high – 5% to 10% – in the education loan segment as against home and car loans (1.5%).
As a result, the growth rate of education loans has been steadily declining. Data from the Reserve Bank of India (RBI) revealed that in 2014-15, the segment grew just 5.7% year-on-year compared to 9.2% in 2013-14, 10% in 2012-13 and 10.36% in 2011-12.
“There is no fall in demand for loans, but the restriction is at the supply points,” said Rajiv Raj of creditvidya.com, an online credit advisory portal. “The defaults are highest in loans of Rs 4 lakh and below, where there is no collateral required.”
Education loans became popular in India after 2001, when the Indian Banks Association (IBA) prepared the ‘model education loan scheme’ to improve accessibility and affordability of education. While during the initial years, the default rate was within limits, it jumped 10%-12% after the global financial crisis of 2008.
KRS Murthy, former director at the Indian Institute of Management-Bangalore (IIM-B), said the job market scenario is crucial as banks take that into consideration before deciding whether to pass loans or not. “It’s fair, as that is how the economy works,” said Murthy. “Apart from certain sectors such as manufacturing, IT and finance, a hiring slump is expected in other sectors this year, further increasing chances of bad loans. Bad loans are the primary reason for the fall in growth rate of education loans.”
A bad loan is where repayment is not made as originally agreed upon by the borrower and the lender.
“Asset quality is a big concern for banks as the job market is not robust or is not paying enough for borrowers to pay off loans,” said Anuradha Rao, who heads personal banking at State Bank of India (SBI), the country’s largest public sector lender.
Adding to the reluctance of banks to disburse education loans, the IBA has listed only 1,100 accredited institutions.
“For admission to a private dental college in Delhi, I applied for a loan of Rs 15 lakh from a private bank. My application was rejected as the college was not in the list of approved institutes. I had to finally approach a private financer, who charged a higher rate of interest,” said Anagha Bhowmik, 20, a second-year student of dental medicine.
While some like Bhowmik are willing to pay a higher interest rate to secure a loan, there are others who need to find ways to repay their loans.
Srikant Ramesh, 25, is juggling two jobs to pay off his education loan of Rs. 4 lakh. An MBA from a tier-two college in Mumbai, Ramesh works in a mid-day shift at a telecom company, where he earns Rs. 18,000 a month, which is not sufficient to pay the EMI and support his family. The Thane-resident is forced to drive a radio cab during spare time. “My loan is for seven years at an interest rate of 12% per annum. I end up spending 70% of my earnings on the monthly instalment,” he said.
Ramesh is not an isolated case. A large number of students are often in a fix when it comes to repaying their education loans. The repayment process usually starts after the ‘moratorium period’, which is either a year after the end of the course or six months after getting a job, whichever is earlier.
The percentage of students taking a loan and the amount varies based on institutes and streams. According to experts, getting loans is more difficult for students who are not applying to top institutions or those who want to pursue off-beat courses. At premier institutions, such as the Indian Institutes of Technology (IIT) and Indian Institutes of Management (IIM), 30% students from a batch usually apply for loans. Students pursuing engineering typically apply for loans in the range of Rs. 7 lakh to Rs. 10 lakh, while those studying management tend to borrow between Rs. 10 lakh and Rs. 40 lakh.
While some top institutes such as IIM-B have started their own financial aid departments, where help, apart from scholarship from the government, is provided to students, others have tied up with various public sector banks to offer loans. Central Bank of India, for instance, provides a loan of up to Rs. 20 lakh with no collateral for students of IIMs. SBI also has special education loans for students securing admission to IITs, IIMs, NITs, AIIMS and other reputed institutions.
Also, a recent proposal by the central government is likely to encourage banks to disburse more education loans without worrying about defaults. The government is looking to create a Rs. 1,000-crore credit guarantee fund for education loans that banks can draw upon in case of defaults. It aims to guarantee a cover of up to 75% of the loan amount.
Bankers, however, are not entirely convinced. “While education sector needs such financial assurances, which will also benefit meritorious students, the risk factor for banks has not been taken into consideration entirely,” said a Canara Bank official, who did not wish to be named.
Credit Score Scare
The Credit Information Bureau (India) Limited (CIBIL) had recently announced that non-repayment of education loans will affect one’s credit score. A credit score reflects the financial health of an individual and is an important parameter for obtaining loans in the future.