Fearing defaults, banks go slow on education loans

IE :Vishwanath Nair : Mumbai, Fri Aug 09 2013, 11:39 hrs

A year after the finance minister urged banks not to turn down education loan applications from deserving candidates, lenders remain skeptical about the business, which, in the past, has been prone to higher defaults. Indeed, the main reason for banks going slow remains the relatively high ratio of non-performing assets (NPAs), which, as per some lenders, is as high as 7%.

"In certain cases, the students who avail loans then disappear from the radar of the bank, making it difficult for us to track them and get repayments," said a senior official at a public sector bank.

Moreover, the weakening economic scenario has significantly increased the probability of defaults on these loans, since job prospects for fresh gaduates have gone down significantly. Banks have stuck to lending to students who go for courses like management, engineering and medicine.

"The government had earlier said that it will be coming out with a education credit guarantee fund but we are still waiting for the announcement. It's not that we will lend with only such a fund, but it gives us a little more comfort," said a banker. A credit guarantee fund will enable banks to lend collateral-free education loans of up to R7.5 lakh.

Currently, banks give out education loans at interest rates between 11.5% and 13%, depending on the course chosen by the student.

The demand of education loans remains strong as more and more middle-class Indian students want to go for higher studies in India and abroad.

According to Neeraj Saxena, business head, Avanse Financial Services, while India spends nearly R80,000 crore on education each year, the outstanding finance towards education is barely at R60,000 crore. Almost 90-95% of this is lending by banks and a small percentage by private lenders like Credila (promoted by Housing Development Finance Corporation) and Avanse (an associate company of Dewan Housing Finance). As per the monthly data released by RBI, the outstanding education loan portfolio of banks stands at R55,500 crore as on June 30, up by 9% from a year ago. In June 2012, outstanding education loans had risen by over 14% year-on-year, the data showed, suggesting that the pace of growth in the business has slowed down.

South India has traditionally been the geography where banks give out more education loans, bankers note. M Narendra, CMD, Indian Overseas Bank (IOB), says that the bank is conducting a 100-day campaign down South, which will have emphasis on education loans.