Unable to find jobs, students default on education loans

Aparna Ramalingam,TNN | Mar 10, 2014, 02.55 AM IST
CHENNAI: They passed out of colleges with high hopes of finding a job with fat salaries. But the lukewarm job market has dented their dreams. 

Several students have defaulted on educational loans. Defaults have risen to 7%-8% of the total outstanding from nearly 5% a year ago. 

As per industry estimates, gross NPAs (non performing assets) or bad loans of some nationalized banks and smaller private banks are as high as 7% to 8%. "The gross NPAs in educational loans have been high for two to three quarters now," TM Bhasin, CMD, Indian Bank said. Indian Bank's portfolio shows that 5% of its educational loans are bad loans. At Indian Overseas Bank (IOB), it stands at around 8%. "The economic slowdown has made it difficult for students to find jobs and that too sometimes at low salaries. This has had an impact on repayments," M Narendra, CMD of IOB said. 

Bankers point out that entry level salaries are now stuck around 2 lakh to 2.5 lakh per annum without any increase. This has also hit loan repayment to some extent. 

"At current interest rates (12%-13%) in educational loans, the equated monthly installment (EMI) of an average loan of 4 lakh is around 8,900 per month. Rent and transportation adds to living expenses and these force many to default on EMI," said a senior banker. 

There are other reasons for rising delinquencies too. "The major reasons are unforeseen circumstances beyond the control of borrowers, like frequent job hopping for better salary and a shift in the place of residence," AK Bansal, chairman of Corporation Bank said. Bad educational loans of this bank more than doubled to 130.56 crore during the third quarter of this financial year as against 58.53 crore during the corresponding quarter of the previous year. 

However, bankers hope things to ease by the end of the quarter. "NPAs will come down by the end of the fiscal with the government promising to pay interest component on loans taken prior to 2009 by a section of borrowers," Indian Bank's Bhasin said. The finance minister has said in the vote on account that the centre would allocate 2,600 crore which will benefit about nine lakh students who had borrowed before 2009. 

Loans for overseas education appear to be safer for banks. "Educational loans in our bank have been of a higher quality when compared to the rest of the industry as most of the students who have availed loans from us have taken it for studies abroad. Students who take such loans almost get some form of assistance, stipend or jobs in the campus while studying abroad. The non-payment issue is higher in the domestic market," C V Rajendran, CMD of Andhra Bank said.