Adding collateral-free education loans to the programme of state-backed loans for several sectors being rolled out would help lenders recoup losses, according to bankers.
There could be some cushion in the education loans segment, which has one of the highest levels of delinquencies, if the government includes it in the Emergency Credit Line Guarantee Scheme (ECLGS), the bankers said.
“The total education loan portfolio has a 9.55% bad loan ratio, it is greater for loans of up to ₹4 lakh, where collateral is not needed,” said a private sector banker on condition of anonymity.
So far, banks and non-bank financiers have given out loans of ₹2.69 trillion to 11 million small enterprises under ECLGS. The outlay, Union finance minister Nirmala Sitharaman said on 28 June, has been increased to ₹4.5 trillion from ₹3 trillion.
The banker cited above said that last year the Reserve Bank of India (RBI) also allowed lenders to classify education loans of up to ₹20 lakh as priority sector lending. While there is incentive to lend to this sector, lenders are not too keen on loans below a certain threshold fearing delinquencies. Education loans of up to ₹4 lakh do not require any collateral, while education loans of up to ₹7.5 lakh can be obtained with collateral in the form of suitable third-party guarantee. However, education loans above ₹7.5 lakh require tangible collateral.
State governments are pushing their own forms of guaranteed loans, but experts are concerned about their implementation, as banks have a uniform national policy on loans. Last week, the West Bengal cabinet approved a plan to backstop education loans of up to ₹10 lakh and allow repayment in 15 years. Chief minister Mamata Banerjee was quoted by news agency PTI as saying the loans will be available for undergraduate, postgraduate, doctoral, and post-doctoral study in India or abroad. A similar scheme was launched by the Delhi government in 2015.
“The recession in the pre-covid years, as well as the impact of the covid-19 pandemic on education and employment opportunities, has worsened, with default rates hitting 9.55% in recent times,” said Adhil Shetty, chief executive of financial services marketplace BankBazaar.com.
“While there is a percentage of default in education loans, we hope that the government intervention in the form of the credit guarantee schemes targeted specially at education loans will ease the situation considerably,” Shetty said.
India’s outstanding student loans stood at ₹89,884 crore as of 31 December 2020, according to data submitted in Parliament.
West Bengal, Bihar, Jharkhand, Odisha, Sikkim, and Andaman and Nicobar have collectively seen 14.21% of education loans turn bad, the highest among regions. This is led by Bihar, which has a bad loan ratio of 25.76%, the data showed.
It is not clear how such state-specific policies will be implemented by lenders, according to K. Srinivasan, convener of the Educational Loans Task Force. This is an association that guides deserving and poor students on availing of bank loans for higher education.
“Banks might not be able to have complete faith in the promises of state governments to guarantee such loans, thus leading to reluctance from the lenders,” Srinivasan said.
At present, there is a central government scheme that covers the interest burden for students from economically weaker sections aiming to pursue technical or professional courses, he said.
Interest starts accruing immediately after the loan is availed, but the government allows a 12-month moratorium till the completion of the course and bears the interest in that period.
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