Education Loans: Shortcoming Of Jobs, Industry Hesitates

Masters degree in any course, any institution is surpassing the level of affordability for majority. 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 evident that there’s a great demand. The shift in government’s focus to primary schooling has resulted in private institutions filling the gap in tertiary education. Globally, as well as in India, cost of attendance (fees and other expenses) for tertiary education has been rising faster than inflation. This is taking education out of the middle class’ reach,” 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 providing over 90 per cent of educational loans, are already weighed down by corporate on account of huge defaults. Private Banks have managed to stay away. But with 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 dependent 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 as high as 7-8 per cent across the segment.

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

Out of 700 universities with numerous affiliated colleges and 20-30 courses, there are only a handful who can promise college placement. With scarcity of employment opportunities, bankers don’t consider education loans as good investment. “Apart from 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 a senior PSU Bank official.

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 August 4 this year to help those who are struggling to repay the loan post their course completion. It may be termed as a loan repayment support or a prompt repayment incentive scheme, offered to youngsters by providing them 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. 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.