Education Loans – Do They Serve Their Real Purpose?

While the Union government and the Reserve Bank of India (RBI) are emphasizing on providing education loans to all needy and deserving students, a much more cautious question is: the loans reach the poor, in accordance with the mandate of the student loan policy to benefit poor students, which has been in place since 2001? Over the past two years, major public sector banks (PSBs) have not met their targets; when the need for educational loan increased, the Lok Sabha was notified.

According to the response given to Lok Sabha, Public Sector Banks (PSBs) are assigned educational loan disbursement targets at the bank level, not at the state or district level. SBI (State Bank of India), Canara Bank and PNB (Punjab National Bank) are the main lenders in this category. However, they have consistently fallen short of their targets, particularly in the last two fiscal years when the need for student loans has increased.

In this regard, Naleen Kumar Kateel, Member of Parliament (MP) raised questions in Lok Sabha on the targets set by the government for student loans and whether the economically weaker strata of society are getting these loans from the Bank.

The top states for student loan sanctioning in India are Tamil Nadu (Rs16,302 crore), Kerala (Rs11,051 crore), Maharashtra (Rs8,882 crore), Karnataka (Rs7,965 crore ) and Andhra Pradesh (Rs6,190 crore). Together, these five states represent 55% of outstanding education loans as of December 31, 2021.

We try to answer these questions, some through the answers of the Lok Sabha and others through our research and analysis. According to CRIF High Mark Credit Information Services Pvt Ltd, 90% of education loans come from public sector banks by value and volume.

Under the student loan scheme, banks can lend up to Rs7.5 lakh for study in India and up to Rs15 lakh for study abroad. For education loans up to Rs4 lakh, no collateral or margin is required, while for loans above this limit, the borrower is required to provide collateral, however, banks are reluctant to lend at this category, so that the social objective of helping students who are struggling to finance their higher education costs is lacking.

The Association of Indian Banks (IBA) formulated a model education loan scheme for its member banks in 2015. The The RBI Circular on the Model Educational Loan Program in 2001 stated that “no deserving student is denied the opportunity to pursue higher education for lack of financial support”.

The rising cost of education makes it difficult for parents to finance their children’s education. An MBA from a top private business school costs more than Rs20 lakh. The cost of education in a top Ivy League college is over $75,000.

According to a study by management consulting group RedSeer, overseas education spending is expected to rise to $80 billion by 2024.

The rising cost situation has been exacerbated by the pay cuts and job losses associated with the pandemic. It is estimated that 1 in 5 students have struggled to cover their fees, even after being at university for a year. As education is a major concern for Indians, education loans are essential in terms of building skills and improving the productivity and efficiency of the economy and people. However, the education loan portfolio is only a tiny fraction of the retail loan portfolio of all commercial banks in India, at around 3.3%.

In August 2015, the IBA published Revised guidance notes on the student loan plan. “The student borrower has no credit history and as such is assumed to be creditworthy as this is a futuristic loan,” he said.

According to the RBI Circular, “The main emphasis is that every deserving student though poor should have the opportunity to continue their studies with the financial support of the banking system on affordable terms.”

Yet students from economically disadvantaged backgrounds who apply for student loans are often rejected by public sector banks, citing their parents’ low credit ratings. Banks are expected to sanction loans to students who belong to economically weaker sections, keeping in mind their board-approved loan policies. However, this is not implemented in practice.

According to RBI data and response to another question raised by MP DK Suresh and Mr. Kateel again, the following figures show outstanding education loans in India.

Outstanding Student Loans in India (in Rs Crore)

The other side of this story is the high number of NPAs (non-performing assets or bad debts) in the education lending segment. The NPA figure for education loans was 8.1%, 8.3% and 7.6%, respectively for FY18, FY19 and FY20, just behind the industrial and agricultural sector. This figure was 9.17% in September 2021 compared to 10.32% in the June quarter 2021. In absolute terms, the NPA in September 2021 stood at Rs 1,023 crore.

However, benefits have been granted to borrowers to deal with the impact of the COVID-19 pandemic on their income. RBI has authorized a six-month moratorium on the payment of all installments falling due between March 1, 2020 and August 31, 2020 without downgrading the asset classification. Further, in its August 2020 monetary policy, the RBI introduced measures to restructure debt if loans were classified as “standard” as of March 1, 2020.

This included rescheduling payments, converting any accrued or accrued interest into another credit facility or granting a moratorium based on assessment of the borrowers’ income stream, subject to a maximum of two years. Accordingly, the overall term of the loan may also be changed accordingly.

Borrowers got the help they needed to weather the pandemic-induced challenges; however, we have a long way to go to achieve educational equity through loans, even after these loans have been available in India for over two decades now!

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