The Changing Framework in the Economics of Education in India due to the Rise in Non-Performing Assets (NPAs) in the Education Loan

The recent trends in the Non-performing assets (NPAs) in the education loan category including public sector banks (PSBs) were found to be 7.82 percent at the end of the September 2022 quarter of the current financial year and as a consequence high defaults of about 8 percent in the education loan portfolio have made banks cautious and go slow on the sanction of such credit.

Outstanding education loans were about Rs 80,000 crore on June 2022. As a result of which, nowadays a cautious approach is adopted at the end of branches while sanctioning education loans due to high NPAs. As a result of which some genuine cases are overlooked and there are delays in the sanctions reducing productivity, overall.

The finance ministry had called a meeting of PSBs to take stock of the education loan portfolio and cut down on delay. The ministry exhorted banks to spread awareness about the Central Sector Interest Subsidy Scheme among field formations. However, at the same time, the sharp increase in non-performing assets (NPA) in education loans extended by commercial banks in India in recent years is a matter of concern, as it is hampering the growth of bank credit for higher education in the country to a great extent.

One of the most important factors to consider here is that in India, around 90 percent of education loans are disbursed by the PSBs. Private sector banks and regional rural banks (RRBs) accounted for around 7 percent and 3 percent of total education loans outstanding, respectively. The outstanding education loans of all banks were Rs 79,056 crore at the end of March 2020 and Rs 78,823 crore as of March 2021, as per the Report on Trend and Progress of Banking in India 2020-21 by the RBI. However, the outstanding loans increased to Rs 82,723 crore as of March 25, 2022. So, we can see that there has been a significant increase over the years.

From an Economic point of view, I believe the major cause of this rising NPAs in the education loan is that fresh job creation has not kept pace with the number of graduates coming out of the colleges, thereby adversely impacting the timely repayment of education loans. As a result, NPAs have gone up and banks are hesitant to grant fresh education advances, particularly loans up to Rs 7.50 lakh which is without any collateral and third-party guarantee.

Education loans of up to Rs 4 lakh do not require any collateral to be provided by the borrower, education loans up to Rs 7.5 lakh can be obtained with collateral in the form of suitable third-party guarantee, while education loans above Rs 7.5 lakh require tangible collateral. In all the above cases, co-obligation of parents is necessary. The second category of education loans is sanctioned to those students who obtain admissions to colleges/universities through management quota, provided they satisfy the minimum marks criteria in the preceding examination. The third category of education loans includes schemes for needy students for pursuing vocational education courses run by industrial training institutes (ITIs), polytechnics, training partners affiliated to National Skill Development Corporation (NSDC)/sector skill councils, state skill mission/corporation, preferably leading to a certificate/diploma/degree issued by such organisation as per National Skill Qualification Framework (NSQF) and any other institutions recognized by either the central or state education boards or university. The fourth category of the scheme specifically caters to the requirement of students studying in premier institutions or courses abroad, with demand for a higher quantum of the loan amount. However, concerning the new rule, all education loans of up to Rs 10 lakh which has been enhanced to Rs 20 lakh in September 2020 have been included within the priority sector definition by the Reserve Bank of India.

Under most of these schemes, the moratorium period consists of the course period plus six months to one year, and there are almost negligible processing fees for schemes with high-value education loans. However, the interest rate under the various schemes consists of a markup of 2-3 percent above the marginal cost of funds-based lending rate (MCLR)/external benchmark, based on the reputation of the course/institutions. The repayment period is generally in the range of 10-15 years.

To conclude, I would like to point out that the effective implementation of the New Education Policy, which lays due emphasis on basic skills development and employability, might very well create a win-win situation for all the stakeholders as the expected employment gap experiences a downward trend.