Student loans have become a significant challenge for Indian banks. While banks are eager to lend to students, they struggle to get the money back. According to recent data from the Reserve Bank of India (RBI), education loans have the highest rate of bad loans within the personal loan segment, despite banks going the extra mile to support students.
The latest Financial Stability Report (FSR) from the RBI indicates that non-performing assets (NPA) in education loans account for 3.6% of the total personal loans category, compared to 1.8% for credit cards, 1.3% for auto loans, and 1.1% for housing loans. This is surprising given that education loans have been a popular choice for lenders in the past year. RBI’s sectoral credit growth data shows that education loans grew by 24.2% in the 12 months ending June 2023, compared to 16.5% in the previous year, making it the third fastest-growing component in personal loans after credit cards and jewelry loans.
In absolute terms, outstanding education loans increased from Rs 83,000 crore in June 2022 to Rs 1.2 lakh crore in May 2024. This growth is puzzling given the high level of bad loans in this segment. Banks are businesses, not charities, so are they missing something in their risk assessments?
Why Are Defaults High?
The primary reason for the high defaults in education loans is the bleak job market, both in India and abroad. While the demand for education loans is rising due to the boom in the education sector, layoffs and hiring freezes are increasing even faster. Post-Covid, there is a clear imbalance between the rush to obtain loans for career building and the lack of job opportunities coupled with rising job losses.
Every time a bank issues a loan to a student, there is an expectation that the borrower will secure a well-paying job to repay the loan with interest. However, this has not been the case, as the data shows. Following the pandemic, there has been a noticeable increase in students seeking loans for higher education, driven by a surge in students wanting to study and work abroad. With overseas campuses reopening and course fees escalating, banks have become the primary source of funding. Non-banking finance companies (NBFCs) have also become active players in this segment.
A Crisil report last year projected a 35-40% growth in education loan assets under management by NBFCs to around Rs 35,000 crore this fiscal year, driven by specialized business models and an increase in students traveling abroad. This growth projection follows a sharp deceleration in education loans in the years before the pandemic.
What Went Wrong?
Education loans are typically considered low-risk by banks, but this perception can change during economic downturns characterized by job losses and hiring cuts. Smaller education loans below Rs 4 lakh do not require collateral, while loans up to Rs 7.5 lakh require an adequate guarantee, and loans above that level necessitate collateral. This has been the standard practice for years.
The problem arises when students fail to secure appropriate jobs or jobs that do not pay enough, leading to repayment issues and putting stress on the bank’s books. This situation has started to manifest. Additionally, rising layoffs contribute to the problem. In May 2024, it was reported that silent layoffs in the Indian IT sector impacted over 20,000 employees. Data from layoffs.fyi indicated that 1,175 tech companies laid off 2,60,509 employees in 2023, marking a 57.8% year-on-year increase. Major companies like Amazon, Google, Meta, and Microsoft were among those making significant layoffs. In India, companies like Byju’s, Unacademy, ShareChat, Swiggy, Ola, and PhysicsWallah also laid off many employees.
Implications for Banks
The banks’ enthusiasm for education loans could backfire if the job market continues to deteriorate, potentially leading to another wave of NPAs. Unlike other loans, recovering education loans is politically sensitive, with local politicians often intervening when banks deny loans or attempt recovery. This situation makes education loans similar to agricultural loans, where political influence is high.
Although education loans constitute a small portion of total bank loans (about 0.72% as of May 2024), significant slippages in this category could still be concerning, especially for some public sector banks where these loans may form a sizable part of their credit portfolio. This situation calls for banks to exercise caution in their lending practices.